Knowledge, Specialization, Consumption Variety and Trade Dependence

This paper provides an analysis of how the development in knowledge results in expanding the consumption variety via promoting specialization and trade dependence. Gains from specialization and trade are reaped with increasing costs for transacting and with increasing interdependence among agents. As such, consumption variety, specialization, transaction costs (in both absolute magnitude and percentage of the total output of the economy), and trade dependence all evolve. Some preliminary empirical evidence consistent with our theory is also presented.