Unpacking sources of comparative advantage: A quantitative approach

Abstract

JEL classification: C15 F11 F15 F17 Keywords:Comparative advantage Gravity Ricardian model Factor endowments Institutional determinants of trade Simulated method of moments This paper develops an approach for quantifying the importance of different sources of comparative advantage, by extending the Eaton and Kortum (2002) model to predict industry trade flows. In this framework, comparative advantage is determined by the interaction of country and industry characteristics, with countries specializing in industries whose production needs they can best meet with their factor endowments and institutional strengths. I estimate the model parameters using: (i) OLS; and (ii) a simulated method of moments procedure that accounts for the prevalence of zeros in the bilateral trade data. I apply the model to explore various quantitative questions, such as how much distance, Ricardian productivity, factor endowments, and institutions each matter for country welfare in the global trade equilibrium.

Does complexity explain the structure of trade?

“…In column 1 we include the interaction terms motivated by the factor proportions theory (physical capital and labour skill). As in Chor (), we find that both interaction terms are positive and statistically significant, confirming that countries well endowed in physical capital per worker and human capital per worker will export goods that make intensive use of these factors of production. In column 2 we introduce our measure of industry‐level complexity interacted with country‐level human capital per worker.…”

Melting ice Caps and the Economic Impact of Opening the Northern Sea Route

“… Other papers employing a multi‐sector Eaton–Kortum model to study a range of questions are Dekle et al . (), Chor (), Costinot et al . (), Shikher () and Levchenko and Zhang ().…”

The Tyranny of Distance and the Gravity of Resources

“…Preferences, institutions and history are now argued to be critical in understanding trade patterns using models of trade in varieties. Conversely, the role of endowments as a source of comparative advantage is believed to have been eroded and there is no longer thought to be a ‘tyranny of distance’ caused by prohibitive transport costs (Overman et al ., ; Romalis, ; Venables, ; Behrens et al ., ; Levchenko, ; Boulhol & De Serres, ; Chor, ).…”