Comparative Advantage, Endowment Structure and Trade Imbalances - Theory and Evidence
30 Pages Posted: 24 Jan 2019
Date Written: January 17, 2019
This paper constructs a theoretical model to illustrate the inherent dynamics between the trade imbalance and the comparative advantage of factor endowment structure under a two-country setting (South vs North). Our model shows that the shift of comparative advantage of factor endowment structure from labor-intensiveness to capital-intensiveness in Southern country would lead to the shrinkage in trade imbalances for the Northern country. We further argue that the increase in the wage level in the Southern country would also lead to the increase in its trade imbalance .Our paper provides a first theoretical look to how the trade imbalance between two trading partners could be affected by the dynamics of comparative advantage of factor endowment structure of respective trading economies. We employ the panel GMM consisted of 157 selected developing countries to test our theory. It is found that the empirical evidences presented in the end are broadly consistent with the theories proposed in this paper.
Keywords: trade imbalance; comparative advantage; factor endowment structure; labor-intensiveness; capital-intensiveness; Southern country; Northern country
JEL Classification: F1, F32, F40
Suggested Citation: Suggested Citation