Abstract
This paper analyzes the relationship between the level of financial development of a country and its comparative advantage in international trade. In fact the link between the two notions seems to perform in a two-side direction: A number of researchers have stressed the key role a country’s financial development is likely to play in its specialization in international trade, thus leading to a comparative advantage in the financially intensive goods, alongside capital and human resources. At the same time, it is argued that countries with comparative advantage in financially intensive goods experience a higher demand for external finance, and therefore financial development. In this paper, we aim to check the existence and the sense of the relation between the two variables within East Asian countries. A time-series approach using the VAR Model has been used to provide long run relationships between financial development and international trade in manufactured goods. Our main result suggests that for most of the countries considered, international trade in manufactured goods enhances financial development.
Highlights
Classical theories of international trade explain the comparative advantage of countries through their differences in technology and factor endowments
As we focus more in long-run relation, Tables 3A to 3C retrace the main cointegration equations we obtained in the various vector error correlation methodology (VECM)
Results of VECMs show that financial development and international trade are linked in Philippines
Summary
Classical theories of international trade explain the comparative advantage of countries through their differences in technology and factor endowments. For those theories, trade is profitable because it allows countries to export goods for which production process uses more intensively the relatively abundant factors of the economy and import goods for which the production process uses more intensively the relatively rare factors of the economy (Heckscher-Ohlin model)(Note 1). Financial development for its part is one of the most important resource allocation mechanisms in a capitalist economy (Ribeiro de Lucinda, 2003). Since the primary works of Bagehot(1873),Hicks(1969),and Schumpeter(1912), number of studies(Gurley and Shaw,1967; King and Levine ,1993a,1993b,1993c; Diamond,1984; Levine,1997, 2005; Levine and Zervos,1996; Beck, Demirgüç-Kunt and Levine,2000; Chinn and Ito, 2005 ) have been conducted to show the positive impact of financial development on the overall economic performance in general, and on economic growth in particular
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