Working Paper: NBER ID: w16834
Authors: John Sutton; Daniel Trefler
Abstract: This paper re-explores the relation between a country's level of wealth and the mix of products it exports. We argue that both are simultaneously determined by countries' capabilities i.e. by countries' productivity and quality levels for each good. Our theoretical setup has two features. (1) Some goods have fewer high-quality producers/countries than others i.e. there is Ricardian comparative advantage. (2) Imperfect competition allows high- and low-quality producers to coexist, which we refer to as 'product ranges'. These two features generate a very particular non-monotonic, general equilibrium relationship between a country's export mix and its wage (GDP per capita). We show that this non-monotonicity permeates the 1980-2005 international data on trade and GDP per capita. Our setup also explains two other facets of the data: (1) Product ranges are huge and (2) for the poorest third of countries, changes in export mix substantially over-predict growth in GDP per capita. This suggests that the main challenge for low-income countries is to raise quality and productivity in their existing product lines.
Keywords: Export mix; Wealth; Capabilities; Productivity; Quality
JEL Codes: F12; O10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher quality capabilities (L15) | More favorable export mix (F14) |
| More favorable export mix (F14) | Higher GDP per capita (O57) |
| Higher quality production in limited range of goods (L15) | Lower derived demand for labor (J29) |
| Lower derived demand for labor (J29) | Lower wages (J31) |
| High-quality goods across broader range (L15) | Higher labor demand (J23) |
| Higher labor demand (J23) | Higher wages (J39) |
| Improvement in quality of certain goods (L15) | Initial gain in market share (D43) |
| Transition to higher-quality goods (L15) | Diminished competitiveness in lower-quality markets (L15) |