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Deductions from the Export Basket: Capabilities, Wealth and Trade

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  • John Sutton
  • Daniel Trefler

Abstract

This paper re-explores the relation between a country's level of wealth and the mix of products it exports. We argue that both are simultaneously determined by countries' capabilities i.e. by countries' productivity and quality levels for each good. Our theoretical setup has two features. (1) Some goods have fewer high-quality producers/countries than others i.e. there is Ricardian comparative advantage. (2) Imperfect competition allows high- and low-quality producers to coexist, which we refer to as 'product ranges'. These two features generate a very particular non-monotonic, general equilibrium relationship between a country's export mix and its wage (GDP per capita). We show that this non-monotonicity permeates the 1980-2005 international data on trade and GDP per capita. Our setup also explains two other facets of the data: (1) Product ranges are huge and (2) for the poorest third of countries, changes in export mix substantially over-predict growth in GDP per capita. This suggests that the main challenge for low-income countries is to raise quality and productivity in their existing product lines.

Suggested Citation

  • John Sutton & Daniel Trefler, 2011. "Deductions from the Export Basket: Capabilities, Wealth and Trade," NBER Working Papers 16834, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16834 Note: ITI
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    File URL: http://www.nber.org/papers/w16834.pdf
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    References listed on IDEAS

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    1. Eric A. Verhoogen, 2008. "Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 489-530.
    2. Richard Baldwin & James Harrigan, 2011. "Zeros, Quality, and Space: Trade Theory and Trade Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 60-88, May.
    3. Maurice Kugler & Eric Verhoogen, 2012. "Prices, Plant Size, and Product Quality," Review of Economic Studies, Oxford University Press, vol. 79(1), pages 307-339.
    4. Lucia Foster & John Haltiwanger & Chad Syverson, 2008. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," American Economic Review, American Economic Association, vol. 98(1), pages 394-425, March.
    5. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
    6. Lall, Sanjaya & Weiss, John & Zhang, Jinkang, 2006. "The "sophistication" of exports: A new trade measure," World Development, Elsevier, vol. 34(2), pages 222-237, February.
    7. Bastos, Paulo & Silva, Joana, 2010. "The quality of a firm's exports: Where you export to matters," Journal of International Economics, Elsevier, vol. 82(2), pages 99-111, November.
    8. Amit Khandelwal, 2010. "The Long and Short (of) Quality Ladders," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1450-1476.
    9. Johnson, Robert C., 2012. "Trade and prices with heterogeneous firms," Journal of International Economics, Elsevier, vol. 86(1), pages 43-56.
    10. Choi, Yo Chul & Hummels, David & Xiang, Chong, 2009. "Explaining import quality: The role of the income distribution," Journal of International Economics, Elsevier, vol. 78(2), pages 293-303, July.
    11. Mary Amiti & Amit K. Khandelwal, 2013. "Import Competition and Quality Upgrading," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 476-490, May.
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    Citations

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    Cited by:

    1. Christian Henn & Chris Papageorgiou & Nicola Spatafora, 2013. "Export Quality in Developing Countries," IMF Working Papers 13/108, International Monetary Fund.
    2. Andreas Reinstaller, 2015. ""Smart Diversifation" im Außenhandel," FIW Policy Brief series 027, FIW.
    3. Moussir, Charaf-Eddine & Tabit, Safaa, 2016. "Diversification des exportations et transformation structurelle au Maroc: Quel rôle pour les IDE ?
      [Export Diversification and Structural Transformation in Morocco: What Role for FDI?]
      ," MPRA Paper 76582, University Library of Munich, Germany.
    4. Martin, Julien & Mejean, Isabelle, 2014. "Low-wage country competition and the quality content of high-wage country exports," Journal of International Economics, Elsevier, vol. 93(1), pages 140-152.
    5. Ge, Ying & Lai, Huiwen & Zhu, Susan Chun, 2015. "Multinational price premium," Journal of Development Economics, Elsevier, vol. 115(C), pages 181-199.
    6. Stefan Schiman & Andreas Reinstaller, 2015. "Analyse der Terms-of-Trade Österreichs," FIW Research Reports series VI-004, FIW.
    7. Andreas Reinstaller & Fabian Unterlass, 2012. "Innovation at the Firm Level across Countries with Different Economic and Technological Capacity," WIFO Working Papers 436, WIFO.

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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