Firm heterogeneity and Ricardian comparative advantage within and across sectors |
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Authors: | Toshihiro Okubo |
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Affiliation: | (1) The Manchester Regional Economic Centre (MREC), Institute for Political and Economic Governance (IPEG), School of Social Science, University of Manchester, 1.8 Humanities Bridgeford Building, Bridgeford Street, Manchester, M13 9PL, UK |
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Abstract: | This paper incorporates Melitz’s Econometrica (71:1695–1725, 2003) heterogeneous-firm trade model in the Ricardian model of comparative advantage with a continuum of sectors introduced by Dornbusch et al. (Am Econ Rev 67(5), 823–839, 1977). In particular, we characterise the equilibrium outcomes when neither sectors nor countries are symmetric. We find that trade patterns can follow Ricardian comparative advantage, while wage rates are proportional to market size due to a home market effect. Interestingly, trade liberalisation hurts the large country but benefits the small one by reducing the number of sectors with two-way trade and expanding those with specialised (one-way) trade. I would like to thank Mike Artis, Richard Baldwin, Frederic Robert-Nicoud, Matthias Helble, Giovanni Facchini, Thierry Verdier and a referee for their helpful comments and suggestions. Also I would like to thank Mike Artis for his excellent proof reading. |
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Keywords: | Comparative advantage Heterogeneous firms Trade liberalisation Wage Home market effect Intra-industry trade |
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