What Goods Do Countries Trade? A Quantitative Exploration of Ricardo's Ideas
The Ricardian model predicts that countries should produce and export relatively more in industries in which they are relatively more productive. Though one of the most celebrated insights in the theory of international trade, this prediction has received virtually no attention in the empirical literature since the mid-sixties. The main reason behind this lack of popularity is the absence of clear theoretical foundations to guide the empirical analysis. Building on the seminal work of Eaton and Kortum (2002), the present paper offers such foundations and uses them to quantify the importance of Ricardian comparative advantage. Using trade and productivity data from 1997, we estimate that, ceteris paribus, the elasticity of bilateral exports with respect to observed productivity is 6.53. From a welfare standpoint, however, the removal of Ricardian comparative advantage at the industry level would only lead, on average, to a 5.5% decrease in the total gains from trade.
We thank Gene Grossman, Gordon Hanson, Giovanni Maggi, Jim Rauch, Stephen Redding, Frédéric Robert-Nicoud, Bob Staiger, Kjetil Storesletten, Jonathan Vogel, Kei-Mu Yi, three anonymous referees, and seminar participants at many institutions 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. This paper is a heavily revised version of the 2007 NBER working paper "What Goods Do Countries Trade? New Ricardian Predictions". The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Arnaud Costinot & Dave Donaldson & Ivana Komunjer, 2012. "What Goods Do Countries Trade? A Quantitative Exploration of Ricardo's Ideas," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 581-608. citation courtesy of