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Comparative Advantage, Complexity, and Volatility

  • Pravin Krishna

    (Johns Hopkins University and NBER)

  • Andrei A. Levchenko

    (University of Michigan and NBER)

Less developed countries tend to experience higher output volatility, a fact that is in part explained by their specialization in more volatile sectors. This paper proposes theoretical explanations for this pattern of specialization -- with the complexity of the goods playing a central role. Speci cally, less developed countries with lower institutional ability to enforce contracts, or alternately, with low levels of human capital will specialize in less complex goods which are also characterized by higher levels of output volatility. We provide novel empirical evidence that less complex industries are indeed more volatile.

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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 632.

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Length: 39 pages
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Handle: RePEc:mie:wpaper:632
Contact details of provider: Postal: ANN ARBOR MICHIGAN 48109
Web page: http://fordschool.umich.edu/rsie/

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  1. Costinot, Arnaud, 2007. "On the Origins of Comparative Advantage," University of California at San Diego, Economics Working Paper Series qt07g7g8h8, Department of Economics, UC San Diego.
  2. Becker, Gary S & Murphy, Kevin M, 1992. "The Division of Labor, Coordination Costs, and Knowledge," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1137-60, November.
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  10. Tom Krebs & Pravin Krishna & William Maloney, 2004. "Trade Policy, Income Risk, and Welfare," Working Papers 2004-09, Brown University, Department of Economics.
  11. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  12. Julian di Giovanni & Andrei A. Levchenko, 2012. "The Risk Content of Exports: A Portfolio View of International Trade," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 8(1), pages 97 - 151.
  13. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains from Variety," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 541-585, May.
  14. Andrei A. Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
  15. Miklos Koren & Silvana Tenreyro, 2005. "Volatility and Development," CEP Discussion Papers dp0706, Centre for Economic Performance, LSE.
  16. R. Dornbusch & S. Fischer & P. A. Samuelson, 1976. "Comparative Advantage, Trade and Payments in a Ricardian Model With a Continuum of Goods," Working papers 178, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. Caballero, R-J & Hammour, M-L, 1996. "The Macroeconomics of Specificity," Working papers 96-25, Massachusetts Institute of Technology (MIT), Department of Economics.
  18. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
  19. Charles I. Jones, 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 1-28, April.
  20. Kevin Cowan & Alejandro Neut, 2007. "Intermediate Goods, Institutions and Output per Worker," Working Papers Central Bank of Chile 420, Central Bank of Chile.
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