This paper analyzes a model of North-South trade with endogenous R&D processes in both regions. North conducts innovating R&D which results in development of new, improved quality varieties. South is involved only in copying at a certain lag behind the North on the quality (product) scale. The question of interest is the impact of trade and IPR protection on the intensive margin of innovation (size of quality jumps) and the extensive margin of imitation (distance in quality, i.e. quality lag of the South) in a steady-state equilibrium. Furthermore, we attempt to derive the growth and welfare e¤ects of trade and IPR policy and to provide possible answers to some questions brought by globalization. Three alternative scenarios are considered: autarky case as a benchmark, free trade case with information protection, and …nally, restricted trade case where we introduce patents of …nite length that insure a particular form of international protection. We …nd that opening to trade increases the growth rate of both regions while it also results in larger lag in the quality level in the South. Furthermore, when comparing the e¤ects of di¤erent IPR protection tools in the trading world, we …nd di¤erences in the magnitude of the e¤ects on the variables of interest and also different direction of the change in the relative purchasing power which may even reverse the change in relative welfare when patent length is used as the IPR protection tool.However, common for both policies is that stronger protection decreases world growth rate and increases the quality lag of the South behind the North.

This paper analyzes the role of product quality and labor efficiency in shaping the trade patterns and trade intensities within and across two groups of countries, the developed and richer North and the developing South. Taking prices as a proxy for quality, recent empirical literature identifies a positive relation between income per capita and both export and import prices, suggesting that rich countries trade goods of relatively higher quality. Instead of relying on specific demand side mechanisms such as non-homothetic preferences, we focus on the North-South differences in technology. We employ a four country North-South trade model with two dimensions of firm heterogeneity. Differences in firms' product qualities and cost efficiencies result in a price distribution generating different consumption bundles and the observed export and import prices across rich and poor countries. Furthermore, the resulting total expenditure allocation across quality shows that the North (South) spends a larger share of its income on high (low) quality even with the same homothetic preferences across regions.JEL: F10, F12, F14, L11, L15