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Capabilities, wealth, and trade: Revisiting the evidence

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  • Kan Yue

Abstract

Sutton and Trefler (2016) present a model that explains how a country's quality capability simultaneously affects per capita income and the sectoral mix of its exports. The model predicts an inverted‐U relationship between an exporter's income and its world market share of export. This paper examines whether the prediction is consistent with the time‐series variations of trade data. We find inverted‐U relationships in all three groups of markets. While market shares do eventually drop as income grows, it happens only when incomes are very high. In addition, exporters' global market progression described in Sutton and Trefler (2016) is accelerated with the presence of a “super” exporter, such as China. Lastly, we confirm the model's implication on how quality capability improvements affect market entry by presenting an inverted‐U relationship between market entry and income in middle‐rank group, with the relationship being negative in low‐rank group and positive in high‐rank group.

Suggested Citation

  • Kan Yue, 2022. "Capabilities, wealth, and trade: Revisiting the evidence," Southern Economic Journal, John Wiley & Sons, vol. 89(2), pages 440-470, October.
    • Handle: RePEc:wly:soecon:v:89:y:2022:i:2:p:440-470
    DOI: 10.1002/soej.12602
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    References listed on IDEAS

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