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Can comparative advantage explain the growth of US trade?

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  • Alejandro Cunat
  • Marco Maffezzoli

Abstract

We present a dynamic comparative advantage model in which moderate reductions in trade costs can generate sizable increases in trade volumes over time. A fall in trade costs has two effects on the volume of trade. First, for given factor endowments, it raises the degree of specialization of countries, leading to a larger volume of trade in the short run. Second, it raises the factor price of each country’s abundant production factor, leading to diverging paths of relative factor endowments across countries and a rising degree of specialization. A simulation exercise shows that a fall in trade costs over time produces a non-linear increase in the trade share of output as in the data. Even when elasticities of substitution are not particularly high, moderate reductions in trade costs lead to large trade volumes over time. We present further empirical evidence in favour of our approach, documenting the link between trade liberalization and the cross-country divergence of investment shares.

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File URL: http://eprints.lse.ac.uk/19919/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19919.

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Length: 28 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:ehl:lserod:19919

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Related research

Keywords: International Trade; Heckscher-Ohlin;

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Citations

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Cited by:
  1. Immaculada Martínez-Zarzoso & Felicitas Nowak-Lehmann D. & Sebastian Vollmer, 2007. "Competitiveness – A Comparison of China and Mexico," CESifo Working Paper Series 2111, CESifo Group Munich.
  2. Cuñat, Alejandro & Maffezzoli, Marco, 2007. "Specialization Patterns and the Factor Bias of Technology," CEPR Discussion Papers 6290, C.E.P.R. Discussion Papers.
  3. Breinlich, Holger & Ottaviano, Gianmarco & Temple, Jonathan, 2013. "Regional Growth and Regional Decline," CEPR Discussion Papers 9568, C.E.P.R. Discussion Papers.
  4. Alejandro Cuñat & Szabolcs Deak & Marco Maffezzoli, 2008. "Tax Cuts in Open Economies," CEP Discussion Papers dp0860, Centre for Economic Performance, LSE.
  5. Raphael Anton Auer, 2010. "Consumer Heterogeneity and the Impact of Trade Liberalization: How Representative is the Representative Agent Framework?," Working Papers 2010-13, Swiss National Bank.
  6. Raphael A. Auer, 2013. "Product Heterogeneity, Cross-Country Taste Differences, and the Consumption Home Bias," Working Papers 13.01, Swiss National Bank, Study Center Gerzensee.
  7. Philip Sauré, 2012. "Bounded Love of Variety and Patterns of Trade," Open Economies Review, Springer, vol. 23(4), pages 645-674, September.
  8. William F. Lincoln & Andrew H. McCallum, 2011. "Entry Costs & Increasing Trade," William Davidson Institute Working Papers Series wp1024, William Davidson Institute at the University of Michigan.
  9. Fuxiang Wu & Zhibiao Liu, 2010. "Microeconomic analysis on the growth of trade volume in China: 1978–2007," Frontiers of Economics in China, Springer, vol. 5(2), pages 299-324, June.
  10. Yonghyup Oh & Wonho Song, 2008. "Sub-Prime Financial Crisis and US Policy Choices," Finance Working Papers 22995, East Asian Bureau of Economic Research.
  11. Raphael Auer, 2009. "Product Heterogeneity, Within-Industry Trade Patterns, and the Home Bias of Consumption?," Working Papers 09.05, Swiss National Bank, Study Center Gerzensee.
  12. Philip Sauré, 2007. "Productivity Growth, Bounded Marginal Utility, and Patterns of Trade," Economics Working Papers ECO2007/56, European University Institute.

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