A Model of Trade with Ricardian Comparative Advantage and Intra-Sectoral Firm Heterogeneity

36 Pages Posted: 17 Nov 2011

See all articles by Haichao Fan

Haichao Fan

Hong Kong University of Science & Technology (HKUST)

Edwin L.-C. Lai

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Han Steffan Qi

Hong Kong University of Science & Technology (HKUST)

Multiple version iconThere are 2 versions of this paper

Date Written: November 17, 2011

Abstract

In this paper, we merge the heterogenous firm trade model of Melitz (2003) with the Ricardian model of Dornbusch, Fisher and Samuelson (DFS 1977) to explain how the pattern of international specialization and trade is determined by the interaction of comparative advantage, economies of scale, country sizes and trade barriers. The model is able to capture the existence of inter-industry trade and intra-industry trade in a single unified framework. It explains how trade openness affects the pattern of international specialization and trade. It generalizes Melitz’s firm selection effect in the face of trade liberalization to a setting where the patterns of inter-industry trade and intra-industry are endogenous. Although opening to trade is unambiguously welfare-improving in both countries, trade liberalization can lead to an counter-Melitz effect in the larger country if it is insufficiently competitive in the sectors where it has the strongest comparative disadvantage but still produces. In this case, the operating productivity cutoff is lowered while the exporting cutoff increases in the face of trade liberalization. This is because the intersectoral resource allocation (IRA) effect dominates the Melitz effect in these sectors. Consequently, the larger country can lose from trade liberalization. Some hypotheses related to firms’ exporting behavior across sectors upon opening up to trade and upon trade liberalization are also derived. Analyses of firm-level data of Chinese manufacturing sectors confirm these hypotheses.

Keywords: inter-industry trade, intra-industry trade, heterogeneous firms, trade liberalization

JEL Classification: F120, F140

Suggested Citation

Fan, Haichao and Lai, Edwin L.-C. and Qi, Han Steffan, A Model of Trade with Ricardian Comparative Advantage and Intra-Sectoral Firm Heterogeneity (November 17, 2011). CESifo Working Paper Series No. 3634. Available at SSRN: https://ssrn.com/abstract=1961047

Haichao Fan

Hong Kong University of Science & Technology (HKUST) ( email )

Department of Economics
Clear Water Bay
Kowloon, 999999
Hong Kong

Edwin L.-C. Lai (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Han Steffan Qi

Hong Kong University of Science & Technology (HKUST) ( email )

Department of Economics
Clear Water Bay
Kowloon, 999999
Hong Kong

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
124
Abstract Views
747
rank
185,791
PlumX Metrics