Comparative Advantage Across Goods and Product Quality

This working paper analyzes the connection between country specialization across goods and country specialization within goods along the quality dimension. It builds a model that introduces quality differentiation and firm heterogeneity into the Dornbusch, Fischer and Samuelson (1977) framework. Country market shares across goods are continuous and decreasing in comparative costs. Within each industry, 1) the highest quality is produced by the country with the absolute advantage in the industry; 2) the lowest quality is produced by the country with the lowest wages; 3) each country s average quality is decreasing in its comparative costs in the industry and increasing in its wage level. The model is consistent with previously documented facts and with the specific empirical motivation being provided: it is shown for some illustrative goods that exporter revealed comparative advantage, conditional on exporter income per capita, is positively correlated with the unit value of exports (unit value being interpreted as a proxy for quality).