Bilateral Trade and Productivity Differences in a Ricardo-Cournot Model

Abstract

Purpose - Using a model that highlights Ricardian comparative advantage and Cournot competition, I derive theoretical predictions on how bilateral measures of trade intensity, specialization, and intraindustry are interrelated, and how Ricardian productivity differences affect these measures. We test the predictions using trade and production data, and confirm them. Design/methodology - A simple two-country general equilibrium model is constructed to derive theory-based bilateral indexes. We then test the relationships among them using panel data for 35 countries and 14 industries between 1996 and 2008. Findings - Bilateral trade intensity is increasing in specialization, as in the classical trade theory, and in intra-industry trade, as in the new trade theory. However, productivity differences positively affect specialization, and negatively affect intra-industry trade. These effects cancel each other; thus productivity differences have little impact on trade intensity. Originality/value - This paper provides a comprehensive conceptual framework for understanding the relationship among trade intensity, specialization, intra-industry trade, and productivity differences. We derive theory-consistent measures of specialization, intra-industry trade, and productivity differences. Moreover, we reevaluate the empirical relevance of these variables for the study of gravity equations. This paper is also an effort to capture oligopolistic competition in a general equilibrium framework, interests in which recently resurged.