Comparative advantage and the cross-section of business cycles
Business cycles are less volatile in rich countries than in poor ones. They are also more synchronized with the world cycle. The authors develop two alternative but noncompeting explanations for those facts. Both explanations proceed from the observation that the law of comparative advantage causes rich and poor countries to specialize in the production of different commodities. In particular, rich countries specialize in high-tech products produced by skilled workers and poor countries specialize in low-tech products produced by unskilled workers. Cross-country differences in business cycles then arise as a result of asymmetries among the industries in which different countries specialize. The authors focus on two such asymmetries. The first, which they label the"comparative bias"hypothesis, is based on the idea that cross-country differences in production costs are more prevalent in high-tech industries, sheltering products from foreign competition and therefore making them large suppliers in the markets for their products. The second, which they label the"cyclical bias"hypothesis, is based on the idea that production costs in low-tech industries may be more sensitive to the shocks that drive business cycles.
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