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Demand Shocks, Sector-level Externalities, and the Evolution of Comparative Advantage

Author

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  • Daniele Verdini

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

Does production size play any role in industrial productivity? And how important is its contribution to the evolution of comparative advantage over time? In this paper, I develop a multi-country multi-sector general equilibrium model of trade characterized by the presence of inter-temporal sector-level externalities. The model makes explicit the mechanism linking size and productivity and delivers at the equilibrium a dynamic gravity model of trade that can be empirically tested. I structurally estimate the dynamic scale parameter by exploiting exogenous demand shocks uncorrelated to any supply-side component of production. Results show that industrial production scale can be a potential source of comparative advantage, with an estimated average dynamic scale parameter of 0.18. However, potential gains are heterogeneous, with values ranging between 0.12 and 0.20 across different industries.

Suggested Citation

  • Daniele Verdini, 2019. "Demand Shocks, Sector-level Externalities, and the Evolution of Comparative Advantage," LIDAM Discussion Papers IRES 2019007, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:2019007
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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