Quality Differentiation, Comparative Advantage, and International Specialization Across Products

CID Research Fellow and Graduate Student Working Paper No. 126

98 Pages Posted: 30 Dec 2017 Last revised: 20 May 2020

See all articles by Ulrich Schetter

Ulrich Schetter

Harvard University - Center for International Development (CID)

Date Written: April 9, 2020

Abstract

We introduce quality differentiation into a Ricardian model of international trade. We show that (1) quality differentiation allows industrialized countries to be active across the full board of products, complex and simple ones, while developing countries systematically specialize in simple products, in line with novel stylized facts. (2) Quality differentiation may thus help to explain why richer countries tend to be more diversified and why, increasingly over time, rich and poor countries tend to export the same products. (3) Quality differentiation implies that the gains from inter-product trade mostly accrue to developing countries. (4) Guided by our theory, we use a censored regression model to estimate the link between a country's GDP per capita and its export quality. We find a much stronger relationship than when using OLS, in line with our theory.

Keywords: Comparative Advantage, Export Diversification, Nestedness, Product Complexity, Quality Differentiation

JEL Classification: F10, F11, F14

Suggested Citation

Schetter, Ulrich, Quality Differentiation, Comparative Advantage, and International Specialization Across Products (April 9, 2020). CID Research Fellow and Graduate Student Working Paper No. 126, Available at SSRN: https://ssrn.com/abstract=3091581 or http://dx.doi.org/10.2139/ssrn.3091581

Ulrich Schetter (Contact Author)

Harvard University - Center for International Development (CID) ( email )

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Cambridge, MA 02138
United States

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