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Comparative advantage and the cross-section of business cycles

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Author Info
Kraay, Aart
Ventura, Jaume

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Abstract

Business cycles are less volatile in rich countries than in poor ones. They are also more synchronized with the world cycle. The authors develop two alternative but noncompeting explanations for those facts. Both explanations proceed from the observation that the law of comparative advantage causes rich and poor countries to specialize in the production of different commodities. In particular, rich countries specialize in high-tech products produced by skilled workers and poor countries specialize in low-tech products produced by unskilled workers. Cross-country differences in business cycles then arise as a result of asymmetries among the industries in which different countries specialize. The authors focus on two such asymmetries. The first, which they label the"comparative bias"hypothesis, is based on the idea that cross-country differences in production costs are more prevalent in high-tech industries, sheltering products from foreign competition and therefore making them large suppliers in the markets for their products. The second, which they label the"cyclical bias"hypothesis, is based on the idea that production costs in low-tech industries may be more sensitive to the shocks that drive business cycles.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1948.

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Date of creation: 31 Jul 1998
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Handle: RePEc:wbk:wbrwps:1948

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Keywords: Environmental Economics&Policies Economic Theory&Research Water and Industry Labor Policies Industrial Management Business Cycles and Stabilization Policies Industrial Management Economic Theory&Research Environmental Economics&Policies Water and Industry

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International Business Cycles: Theory and Evidence," Working Papers 93-21, New York University, Leonard N. Stern School of Business, Department of Economics.
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  2. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare And Macroeconomic Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 421-445, May. [Downloadable!] (restricted)
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  3. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Staff Report 227, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  5. Marianne Baxter, 1995. "International Trade and Business Cycles," NBER Working Papers 5025, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Chinhui Juhn & Kevin M. Murphy & Robert H. Topel, 1992. "Why Has the Natural Rate of Unemployment Increased over Time?," NBER Reprints 1694, National Bureau of Economic Research, Inc.
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  7. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  8. Jeffrey A. Frankel & David Romer, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June. [Downloadable!] (restricted)
  9. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
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  10. Kraay, Aart & Ventura, Jaume, 1995. "Trade and fluctuations," Policy Research Working Paper Series 1560, The World Bank. [Downloadable!]
  11. Acemoglu, Daron & Zilibotti, Fabrizio, 1997. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 709-51, August.
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  1. Alejandro Cuñat & Marco Maffezzoli, . "Heckscher-Ohlin Business Cycles," Working Papers 210, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  2. Miklos Koren & Silvana Tenreyro, 2005. "Volatility and Development," CEP Discussion Papers dp0706, Centre for Economic Performance, LSE. [Downloadable!]
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  3. Rose, Andrew K & Spiegel, Mark, 2007. "International Financial Remoteness and Macroeconomic Volatility," CEPR Discussion Papers 6301, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Daron Acemoglu & Simon Johnson & James Robinson & Pierre Yared, 2005. "Income and Democracy," NBER Working Papers 11205, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Christian Ariel Volpe Martincus & Andrea Molinari, 2005. "Regional Business Cycles and National Economic Borders - What are the Effects of Trade in Developing Countries?," ERSA conference papers ersa05p93, European Regional Science Association. [Downloadable!]
  6. Koren, Miklós & Tenreyro, Silvana, 2007. "Technological Diversification," CEPR Discussion Papers 6523, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Daron Acemoglu & Simon Johnson & James Robinson & Yunyong Thaicharoen, 2002. "Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth," NBER Working Papers 9124, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Christian Volpe Martincus & Andrea Molinari, 2007. "Regional Business Cycles and National Economic Borders: What Are the Effects of Trade in Developing Countries?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(1), pages 140-178, April. [Downloadable!] (restricted)
  9. Diemo Dietrich, 2004. "Financing FDI into Developing Economies and the International Transmission of Business Cycle Fluctuations," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(IV), pages 449-481, December. [Downloadable!]
  10. Xavier Gabaix, 2004. "Power laws and the origins of aggregate fluctuations," Econometric Society 2004 North American Summer Meetings 484, Econometric Society. [Downloadable!]
  11. Aart Kraay & Jaume Ventura, 2000. "Product Prices and the OECD Cycle," NBER Working Papers 7788, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Luis Catão & Bennett Sutton, 2002. "Sovereign Defaults: The Role of Volatility," IMF Working Papers 02/149, International Monetary Fund. [Downloadable!]
  13. Daniel Levy & Hashem Dezhbakhsh, 2004. "International Evidence on Output Fluctuation and Shock Persistence," Macroeconomics 0402016, EconWPA. [Downloadable!]
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  14. Philip R. Lane, 2002. "The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD," Trinity Economics Papers 20022, Trinity College Dublin, Department of Economics. [Downloadable!]
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  15. Miklos Koren & Silvana Tenreyro, 2003. "Diversification and development," Working Papers 03-3, Federal Reserve Bank of Boston. [Downloadable!]
  16. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2004. "Growth Volatility and Financial Liberalization," NBER Working Papers 10560, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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