Product Innovation and Employment in an Open economy

Abstract

The paper provides a theoretical framework explaining the impact of product innovation on the economic system when a new good, in an open economy, assuming duopolistic market structures is introduced. It also explores how this new introduction gets affected by the microeconomic preferences of the different economic players in the economic system. We begin by developing a static economic model analyzing how consumers make their preferences between old goods and newly introduced goods using a Cobb-Douglas utility function and then show  how the macroeconomic factors namely consumption, savings, wage and employment affect the production of these two goods. We analyze two cases, first when there is an existence of surplus labour in the economy and the second when the surplus labour does not exist. The model results in some interesting conclusions, an important one being that in the presence of surplus labour, the expansion of a new good sector leads to a higher employment in the economy as well as the consolidation of the old good sector. Interestingly in the second case when the surplus labour does not exist, the increased demand for labour as a result of the development of the new good sector decreases the labour employed in the old good sector. But assuming a mature old good sector and economies of scale, the production of the old good increases but the old good sector shrinks.