Abstract
This paper presents a dynamic general equilibrium model with trade between two structurally identical countries. There is endogenous skill acquisition by agents and innovation decisions by firms. I present two versions: one in which innovations consist of firms improving upon existing products (vertical innovation) and other in which firms develop new varieties (horizontal innovation). Contrary to results in the earlier literature, I find that trade liberalization can promote economic growth and increase the skilled-wage premium in both settings. The main result of the paper is that trade liberalization promotes growth and increases the relative wage of skilled workers when intellectual property rights protection is sufficiently weak.