Demand Shocks, Sector-level Externalities, and the Evolution of Comparative Advantage
(2019) , 35 pages
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- Abstract
- Does production size play any role in industrial productivity? And how important is its contribution to the evolution of comparative advantage over time? In this paper, I develop a multi-country multi-sector general equilibrium model of trade characterized by the presence of inter-temporal sector-level externalities. The model makes explicit the mechanism linking size and productivity and delivers at the equilibrium a dynamic gravity model of trade that can be empirically tested. I structurally estimate the dynamic scale parameter by exploiting exogenous demand shocks uncorrelated to any supply-side component of production. Results show that industrial production scale can be a potential source of comparative advantage, with an estimated average dynamic scale parameter of 0.18. However, potential gains are heterogeneous, with values ranging between 0.12 and 0.20 across different industries.
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Verdini, D. (2019). Demand Shocks, Sector-level Externalities, and the Evolution of Comparative Advantage (IRES Discussion papers 2019007). https://hdl.handle.net/2078.5/91208