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Geography, Non-Homotheticity, and Industrialization: A Quantitative Analysis

  • Holger Breinlich
  • Alejandro Cuñat

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 cor-relation 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 ana-lyze the effect of increases in agricultural productivity and a further lowering of trade barriers.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3927.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3927
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