Comparative Advantage and Heterogeneous Firms

51 Pages Posted: 21 Jun 2005

See all articles by Andrew B. Bernard

Andrew B. Bernard

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Stephen J. Redding

Princeton University

Peter K. Schott

Yale University - School of Management; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Multiple version iconThere are 2 versions of this paper

Date Written: June 2005

Abstract

This paper examines how country, industry and firm characteristics interact in general equilibrium to determine nations' responses to trade liberalization. When firms possess heterogeneous productivity, countries differ in relative factor abundance and industries vary in factor intensity, falling trade costs induce reallocations of resources both within and across industries and countries. These reallocations generate substantial job turnover in all sectors, spur relatively more creative destruction in comparative advantage industries than comparative disadvantage industries, and magnify ex ante comparative advantage to create additional welfare gains from trade. The relative ascendance of high-productivity firms within industries boosts aggregate productivity and drives down consumer prices. In contrast with the neoclassical model, these price declines dampen and can even reverse the real wage losses of scarce factors as countries liberalize.

Keywords: Heckscher-Ohlin, inter-industry trade, intra-industry trade, trade costs, entry and exit, job creation and destruction, product variety, Ricardian productivity, creative destruction, exporting, missing trade

JEL Classification: F11, F12, L11

Suggested Citation

Bernard, Andrew B. and Redding, Stephen J. and Schott, Peter K., Comparative Advantage and Heterogeneous Firms (June 2005). Yale SOM Working Paper No. ES-46; Tuck School of Business Working Paper No. 2005-21. Available at SSRN: https://ssrn.com/abstract=745504 or http://dx.doi.org/10.2139/ssrn.745504

Andrew B. Bernard (Contact Author)

Dartmouth College - Tuck School of Business ( email )

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HOME PAGE: http://mba.tuck.dartmouth.edu/pages/faculty/Andrew.Bernard/

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR) ( email )

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Stephen J. Redding

Princeton University ( email )

Princeton, NJ 08544-1021
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HOME PAGE: http://www.princeton.edu/~reddings/

Peter K. Schott

Yale University - School of Management ( email )

135 Prospect Street
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203-436-4260 (Phone)
203-436-6974 (Fax)

HOME PAGE: http://www.som.yale.edu/faculty/pks4

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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