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Human Capital, Product Quality, and Bilateral Trade

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  • Michael E. Waugh

    (Federal Reserve Bank of Minneapolis)

Abstract

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.

Suggested Citation

  • Michael E. Waugh, 2009. "Human Capital, Product Quality, and Bilateral Trade," 2009 Meeting Papers 1204, Society for Economic Dynamics.
  • Handle: RePEc:red:sed009:1204
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    References listed on IDEAS

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    1. N/A, 2000. "At a Glance," National Institute Economic Review, National Institute of Economic and Social Research, vol. 174(1), pages 2-2, October.
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    3. N/A, 2000. "At a Glance," National Institute Economic Review, National Institute of Economic and Social Research, vol. 172(1), pages 2-2, April.
    4. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
    5. N/A, 2000. "At a Glance," National Institute Economic Review, National Institute of Economic and Social Research, vol. 171(1), pages 2-3, January.
    6. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    7. 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.
    8. Manning, Willard G. & Mullahy, John, 2001. "Estimating log models: to transform or not to transform?," Journal of Health Economics, Elsevier, vol. 20(4), pages 461-494, July.
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