What Goods Do Countries Trade? A Quantitative Exploration of Ricardo's Ideas

Abstract

The Ricardian model predicts that countries should produce and export relatively more in industries in which they are relatively more productive.Though one of the most celebrated insights in the theory of international trade, this prediction has received virtually no attention in the empirical literature since the mid-sixties.The main reason behind this lack of popularity is the absence of clear theoretical foundations to guide the empirical analysis.Building on the seminal work of Eaton and Kortum (2002), the present paper offers such foundations and uses them to quantify the importance of Ricardian comparative advantage.Using trade and productivity data from 1997, we estimate that, ceteris paribus, the elasticity of bilateral exports with respect to observed productivity is 6.53.From a welfare standpoint, however, the removal of Ricardian comparative advantage at the industry level would only lead, on average, to a 5.5% decrease in the total gains from trade.

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