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Human Capital, Product Quality, and Bilateral Trade

  • Michael E. Waugh

    (Federal Reserve Bank of Minneapolis)

In this paper, I develop a quantitative, general equilibrium theory of product quality and international trade. In the model, producers make choices regarding the quality/technology of their intermediate inputs given the set of endowments they have access to. This choice affects the producers ability to produce goods domestically and internationally, thus shaping the pattern of bilateral trade. In otherwise identical countries, optimizing behavior results in: (i) the high human capital country importing a relatively small volume of goods from the low human capital country and (ii) the low human capital country importing a relatively large volume of goods from the high human capital country --- qualitatively consistent with the observed volume of bilateral trade between rich and poor countries. I quantify the theory for a sample of 77 countries and show that it explains up to 90 percent of the variation in bilateral trade; twice the amount of alternative models with no role for human capital and product quality.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 1204.

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Date of creation: 2009
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Handle: RePEc:red:sed009:1204
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  1. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-39, December.
  2. Maurice Kugler & Eric A. Verhoogen, 2007. "Product Quality at the Plant Level: Plant Size, Exports, Output Prices and Input Prices in Colombia," Discussion Papers 0708-12, Columbia University, Department of Economics.
  3. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
  4. Michael E. Waugh, 2009. "International trade and income differences," Staff Report 435, Federal Reserve Bank of Minneapolis.
  5. Peter K. Schott, 2004. "Across-product Versus Within-product Specialization in International Trade," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 646-677, May.
  6. Robert C. Feenstra & Robert E. Lipsey & Harry P. Bowen, 1997. "World Trade Flows, 1970-1992, with Production and Tariff Data," NBER Working Papers 5910, National Bureau of Economic Research, Inc.
  7. Anonymous, 1997. "Research Updates," Journal of Food Distribution Research, Food Distribution Research Society, vol. 28(1), February.
  8. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September.
  9. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
  10. Willard G. Manning & John Mullahy, 1999. "Estimating Log Models: To Transform or Not to Transform?," NBER Technical Working Papers 0246, National Bureau of Economic Research, Inc.
  11. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
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