Unpacking Sources of Comparative Advantage: A Quantitative Approach

Abstract

This paper develops an approach for quantifying the importance of different sources of comparative advantage for country welfare, based on the Eaton and Kortum (2002) model extended to predict industry trade flows. In this framework, comparative advantage is determined by the interaction of country and industry characteristics, with countries specializing in industries whose production needs they can best meet with their factor endowments and institutional strengths. I estimate the model parameters using a simulated method of moments procedure to account for the prevalence of zeroes in the bilateral trade data. I apply the model to explore various quantitative questions, such as how much distance, Ricardian productivity, factor endowments, and institutions each matter for country welfare in the global trade equilibrium.

Keywords: Comparative advantage, bilateral trade flows, gravity, Ricardian model, factor endowments, institutional determinants of trade, simulated method of moments

JEL Classification: C15, F11, F15, F17