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Revisiting Ricardo: Can productivity differences explain the pattern of trade between EU countries?

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  • Wilfried Altzinger
  • Joze P. Damijan

Abstract

In this paper we revise the empirical tests of the Ricardian model by testing properly the Ricardian hypotheses on bilateral trade flows. Our tests are based on NACE 2-digit industry aggregation of productivity and of bilateral trade flows between 21 EU member states for the period 1994-2004. We compare the matchings between relative bilateral sectoral productivity rankings and bilateral sectoral exports-to-imports ratio rankings for each of 21 x 20 country pairs. We find that the Ricardian hypothesis is surprisingly good at predicting the static pattern of bilateral trade between individual EU member states even after controlling for the Heckscher-Ohlin type of capital-to-labor ratios. Long-term changes in the bilateral trade patterns, however, do not seem to be explained consistently neither by the variation in changes of relative productivity nor by the variation in changes of capital-to-labor ratios. Furthermore, we find quite a strong autoregressive impact of initial trade patterns on the long-term comparative advantages in the bilateral trade among countries. This implies that comparative advantages are structural by nature and that Ricardian differences in relative productivity can account for a good part of their static representation. Explaining their dynamic evolution over time, however, requires further research.

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Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 23509.

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Date of creation: 2009
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Handle: RePEc:lic:licosd:23509

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Keywords: international trade; productivity; Ricardian hypothesis; empirical tests;

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  1. Hummels, David & Levinsohn, James, 1995. "Monopolistic Competition and International Trade: Reconsidering the Evidence," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 799-836, August.
  2. Patrik Tingvall, 2004. "The dynamics of European industrial structure," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(4), pages 665-687, December.
  3. Harry P. Bowen & Edward E. Leamer & Leo Sveikauskas, 1986. "Multicountry, Multifactor Tests of the Factor Abundance Theory," NBER Working Papers 1918, National Bureau of Economic Research, Inc.
  4. James Harrigan, 1998. "Estimation of cross-country differences in industry production functions," Staff Reports 36, Federal Reserve Bank of New York.
  5. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-39, December.
  6. Proudman, James & Redding, Stephen, 2000. "Evolving Patterns of International Trade," Review of International Economics, Wiley Blackwell, vol. 8(3), pages 373-96, August.
  7. Trefler, Daniel, 1993. "International Factor Price Differences: Leontief Was Right!," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 961-87, December.
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