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How many dimensions do we trade in ? product space geometry and latent comparative advantage

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  • Arvis, Jean-Francois
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    Abstract

    This paper proposes a new quantitative implementation of Balassa's idea that export composition and revealed comparative advantage inform the relationship between endowments in domestic factors of production and exports. It proposes that the export composition of countries is close to a low-dimensional manifold or"Product Space"within the space of export composition, which has as many dimensions as product lines. The Product Space corresponds to a few latent endowments explaining the structure of the trade matrix. The model uses non-linear techniques to identify the product space from the 2010 export matrix of 128 countries and 61 products, and to estimate the latent factors of endowments by country. It formalizes a concept of latent comparative advantage, which has practical country specific applications, relevant for"trade competitiveness"policies. Compared with classical revealed comparative advantage, the model assesses how well countries are matching their potential implied by the latent variables, and also identifies products for which the latent advantage is not yet revealed (extensive margin). The data suggests that the degree of overlap between latent and revealed advantage is a metric of"trade competitiveness."

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6478.

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    Date of creation: 01 Jun 2013
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    Handle: RePEc:wbk:wbrwps:6478

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    Related research

    Keywords: Economic Theory&Research; Markets and Market Access; Inequality; Free Trade; E-Business;

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    1. J. M. C. Santos Silva & Silvana Tenreyro, 2006. "The Log of Gravity," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 641-658, November.
    2. Hausmann, Ricardo & Hwang, Jason & Rodrik, Dani, 2006. "What You Export Matters," CEPR Discussion Papers 5444, C.E.P.R. Discussion Papers.
    3. J. Peter Neary, 2006. "Measuring Competitiveness," IMF Working Papers 06/209, International Monetary Fund.
    4. McMillan, Margaret & Rodrik, Dani, 2012. "Globalization, structural change, and productivity growth:," IFPRI discussion papers 1160, International Food Policy Research Institute (IFPRI).
    5. Hausmann, Ricardo & Klinger, Bailey, 2006. "Structural Transformation and Patterns of Comparative Advantage in the Product Space," Working Paper Series rwp06-041, Harvard University, John F. Kennedy School of Government.
    6. Baldwin, Richard & Venables, Anthony J., 2010. "Relocating the value chain: Off-shoring and agglomeration in the global economy," CEPR Discussion Papers 8163, C.E.P.R. Discussion Papers.
    7. Nathan Nunn, 2005. "Relationship Specificity, Incomplete Contracts and the Pattern of Trade," International Trade 0512018, EconWPA.
    8. Matteo Barigozzi & Giorgio Fagiolo & Diego Garlaschelli, 2009. "Multinetwork of international trade: A commodity-specific analysis," Papers 0908.1879, arXiv.org, revised Jun 2010.
    9. Balassa, Bela, 1986. "Comparative Advantage in Manufactured Goods: A Reappraisal," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 315-19, May.
    10. Jose Guilherme Reis & Thomas Farole, 2012. "Trade Competitiveness Diagnostic Toolkit," World Bank Publications, The World Bank, number 2248, January.
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