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Geography, non-homotheticity, and industrialization: A quantitative analysis

  • Breinlich, Holger
  • Cuñat, Alejandro

We propose a quantitative framework for the analysis of industrialization in which specialization in manufacturing or agriculture is driven by comparative advantage and non-homothetic preferences. Countries are integrated through trade but trade is not costless and geographic position matters. We use a number of analytical examples and a multi-country calibration to explain two important empirical regularities: (i) there is a strong positive correlation between proximity to large markets and levels of manufacturing activity; (ii) there is a positive correlation between the ratio of agricultural to manufacturing productivity and shares of manufacturing in GDP. Our calibrated model replicates these facts and also provides a better fit to cross-sectional data on manufacturing shares than frameworks which ignore the role of trade costs or non-homotheticity. We use the calibrated model to quantitatively analyze the effect of increases in agricultural productivity and a further lowering of trade barriers.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 103 (2013)
Issue (Month): C ()
Pages: 133-153

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Handle: RePEc:eee:deveco:v:103:y:2013:i:c:p:133-153
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