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Does comparative advantage make countries competitive? A comparison of China and Mexico

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  • Nowak-Lehmann D., Felicitas
  • Vollmer, Sebastian
  • Martínez-Zarzoso, Inmaculada

Abstract

Latin American countries have lost competitiveness in world markets in comparison to China over the last two decades. The main purpose of this study is to examine the causes of this development. To this end an augmented Dornbusch-type Ricardian” model is estimated using panel data. The explanatory variables considered are productivity, unit labor costs, unit values, trade costs, price levels, and real exchange rates; all variables are evaluated in relative terms. Due to data restrictions, China's relative exports (to the US, Argentina, Japan, Korea, the UK, Germany, and Spain) will be compared to Mexico's exports for a number of sectors over a limited period of eleven years. Panel and pooled estimation techniques (SUR estimation, panel Feasible Generalized Least Squares (panel/pooled FGLS)) will be utilized to better control for country-specific effects and correlation over time. A simulation underlines the positive impact of relative real exchange rate advantages on relative exports for the textile sector. Standardized ß-coefficients identify relative real exchange rates, relative cost levels, and relative unit values as the drivers of competitive advantage in the textile sector. --

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Paper provided by University of Goettingen, Department of Economics in its series Center for European, Governance and Economic Development Research Discussion Papers with number 74.

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Date of creation: 2008
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Handle: RePEc:zbw:cegedp:74

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Keywords: Ricardian model of trade; panel data models; panel Feasible Generalized Least Squares; Seemingly Unrelated (SUR) estimation;

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  1. 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.
  2. Rodrik, Dani, 2006. "What's So Special about China's Exports?," Working Paper Series rwp06-001, Harvard University, John F. Kennedy School of Government.
  3. Ehsan U. Choudhri & Lawrence L. Schembri, 2002. "Productivity performance and international competitiveness: an old test reconsidered," Canadian Journal of Economics, Canadian Economics Association, vol. 35(2), pages 341-362, May.
  4. Peter Drysdale & Ligang Song, 2001. "Evidence of Shifts in the Determinants of Japanese Manufacturing Trade 1970-95," Asia Pacific Economic Papers, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University 321, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  5. Golub, Stephen S & Hsieh, Chang-Tai, 2000. "Classical Ricardian Theory of Comparative Advantage Revisited," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 221-34, May.
  6. Peter K. Schott, 2006. "The Relative Sophistication of Chinese Exports," NBER Working Papers 12173, National Bureau of Economic Research, Inc.
  7. Lücke, Matthias & Rothert, Jacek, 2006. "Central Asia's comparative advantage in international trade," Kiel Economic Policy Papers 6, Kiel Institute for the World Economy (IfW).
  8. Sebastian Dullien, 2005. "China's Changing Competitive Position: Lessons from a Unit-Labor- Cost-Based REER," International Trade, EconWPA 0502016, EconWPA.
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