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Comparative advantage and the cross-section of business cycles

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  • Kraay, Aart
  • Ventura, Jaume

Abstract

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.

Suggested Citation

  • Kraay, Aart & Ventura, Jaume, 1998. "Comparative advantage and the cross-section of business cycles," Policy Research Working Paper Series 1948, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1948
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    References listed on IDEAS

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    1. Acemoglu, Daron & Zilibotti, Fabrizio, 1997. "Was Prometheus Unbound by Chance? Risk, Diversification, and Growth," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 709-751, August.
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    8. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International Business Cycles: Theory and Evidence," NBER Working Papers 4493, National Bureau of Economic Research, Inc.
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    11. Chinhui Juhn & Kevin M. Murphy & Robert H. Topel, 1991. "Why Has the Natural Rate of Unemployment Increased over Time?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 75-142.
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    More about this item

    Keywords

    Environmental Economics&Policies; Economic Theory&Research; Water and Industry; Labor Policies; Industrial Management; Business Cycles and Stabilization Policies; Industrial Management; Economic Theory&Research; Environmental Economics&Policies; Water and Industry;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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