Implied Comparative Advantage

The comparative advantage of a location dictates its industrial structure. Current theoretical models based on this principle do not take a stance on how comparative advantages in different industries or locations correlate with each other, or what such patterns of correlation might imply about the underlying process that governs the evolution of comparative advantage. In fact, we find that correlations do appear to exist: industries tend to exhibit output intensities that are systematically correlated across locations, and locations tend to have output intensities that are correlated across industries. We give evidence that these patterns are present in a wide variety of contexts, namely the export of goods (internationally) and the employment, payroll and number of establishments across the industries of subnational regions (in the US, Chile and India). We then calculate the industry intensities that are implied by related industries or related locations, and show that these measures explain much of the location’s current industrial structure. Furthermore, the deviations between the actual industry structure and our implied comparative advantage measures tend to be highly predictive of future industry growth, especially at horizons of a decade or more; this explanatory power holds at both the intensive as well as the extensive margin. These results indicate that future productivity is already implied in today’s patterns of production.