Revealing Ricardian Comparative Advantage with Micro and Macro Data

Abstract

We propose a sufficient statistics approach to measuring Ricardian comparative advantage based on a quantitative trade model simultaneously featuring cross-country differences in productivity, factor prices, and market size, as well as monopolistic competition, endogenous markups, and firm heterogeneity. The model’s micro-foundations do not necessarily imply that the relevant data for the proposed sufficient statistics must include micro information, but its micro-structure is needed to understand how only macro information can be used instead. Applying the proposed approach to Chinese micro data and cross-country macro data, we show that imperfect competition with endogenous markups and firm heterogeneity have far-reaching implications for correctly measuring Ricardian comparative advantage, and understanding its relation with the Balassa index of Revealed comparative advantage.

Keywords: Ricardian Comparative Advantage, Revealed Comparative Advantage, Sufficient Statistics, Imperfect Competition, Firm Heterogeneity, Endogenous Markups

JEL Classification: F11, F12, F14, F17