What Goods Do Countries Trade? New Ricardian Predictions
Though one of the pillars of the theory of international trade, the extreme predictions of the Ricardian model have made it unsuitable for empirical purposes. A seminal contribution of Eaton and Kortum (2002) is to demonstrate that random productivity shocks are sufficient to make the Ricardian model empirically relevant. While successful at explaining trade volumes, their model remains silent with regards to one important question: What goods do countries trade? Our main contribution is to generalize their approach and provide an empirically meaningful answer to this question.
Acknowledgments: We thank Gene Grossman, Gordon Hanson, Giovanni Maggi, Jim Rauch, Frédéric Robert-Nicoud, Bob Staiger and seminar participants at UC Davis, UC Irvine, Penn State, UC San Diego, Princeton IES Summer Workshop, Michigan, Yale, Harvard, U of Toronto, and U of Texas at Austin for very helpful comments. We also thank Don Davis and Sam Kortum for stimulating discussions and precious advice at the Princeton IES Summer Workshop. Nadege Plesier provided excellent research assistance. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.