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Does comparative advantage make countries competitive? A comparison of China and Mexico


  • Nowak-Lehmann D., Felicitas
  • Vollmer, Sebastian
  • Martínez-Zarzoso, Inmaculada


Latin American countries have lost competitiveness in world markets in comparison to China over the last two decades. The main purpose of this study is to examine the causes of this development. To this end an augmented Dornbusch-type Ricardian' model is estimated using panel data. The explanatory variables considered are productivity, unit labor costs, unit values, trade costs, price levels, and real exchange rates; all variables are evaluated in relative terms. Due to data restrictions, China's relative exports (to the US, Argentina, Japan, Korea, the UK, Germany, and Spain) will be compared to Mexico's exports for a number of sectors over a limited period of eleven years. Panel and pooled estimation techniques (SUR estimation, panel Feasible Generalized Least Squares (panel/pooled FGLS)) will be utilized to better control for country-specific effects and correlation over time. A simulation underlines the positive impact of relative real exchange rate advantages on relative exports for the textile sector. Standardized ß-coefficients identify relative real exchange rates, relative cost levels, and relative unit values as the drivers of competitive advantage in the textile sector.

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  • Nowak-Lehmann D., Felicitas & Vollmer, Sebastian & Martínez-Zarzoso, Inmaculada, 2008. "Does comparative advantage make countries competitive? A comparison of China and Mexico," Center for European, Governance and Economic Development Research Discussion Papers 74, University of Goettingen, Department of Economics.
  • Handle: RePEc:zbw:cegedp:74

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    References listed on IDEAS

    1. Ehsan U. Choudhri & Lawrence L. Schembri, 2002. "Productivity performance and international competitiveness: an old test reconsidered," Canadian Journal of Economics, Canadian Economics Association, vol. 35(2), pages 341-362, May.
    2. Alan V. Deardorff, 2014. "Local comparative advantage: Trade costs and the pattern of trade," International Journal of Economic Theory, The International Society for Economic Theory, vol. 10(1), pages 9-35, March.
    3. Golub, Stephen S & Hsieh, Chang-Tai, 2000. "Classical Ricardian Theory of Comparative Advantage Revisited," Review of International Economics, Wiley Blackwell, vol. 8(2), pages 221-234, May.
    4. Dani Rodrik, 2006. "What's So Special about China's Exports?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 14(5), pages 1-19.
    5. 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 823-839, December.
    6. Sebastian Dullien, 2005. "China's Changing Competitive Position: Lessons from a Unit-Labor- Cost-Based REER," International Trade 0502016, EconWPA.
    7. Peter K. Schott, 2008. "The relative sophistication of Chinese exports," Economic Policy, CEPR;CES;MSH, vol. 23, pages 5-49, January.
    8. Lücke, Matthias & Rothert, Jacek, 2006. "Central Asia's comparative advantage in international trade," Kiel Economic Policy Papers 6, Kiel Institute for the World Economy (IfW).
    9. Peter Drysdale & Ligang Song, 2001. "Evidence of Shifts in the Determinants of Japanese Manufacturing Trade 1970-95," Asia Pacific Economic Papers 321, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
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    More about this item


    Ricardian model of trade; panel data models; panel Feasible Generalized Least Squares; Seemingly Unrelated (SUR) estimation;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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