Is Ricardo Still Relevant? An Empirical Re-Examination of Ricardian Trade Theory

Abstract

Ricardian trade theory predicts that countries should produce and export according to their comparative advantage, exporting relatively more in industries in which they can produce at a lower relative cost. Although this is one of the fundamental theories of international trade, it has received little attention in the modern empirical literature, except for the recent key contribution by Costinot et al. (2012). I adopt their innovative theoretical framework to re-estimate Ricardian comparative advantage using the first direct comparison of relative exports and relative productivities. Thus, in this paper, I provide the first theoretically consistent estimation of the extent to which relative bilateral trade flows can be explained by relative productivity differences i.e. Ricardian Comparative Advantage. I show that, although there is a significant positive correlation between the degree of a country's comparative advantage and its bilateral trade flows, relative productivity differences only explain a very small percentage of relative bilateral trade flows. I then estimate the impact of Ricardian Comparative Advantage across a number of sub-samples of industries and countries to explore the drivers of deviations from comparative advantage in the patterns of international trade. Following this analysis, I argue that Ricardian Comparative Advantage better predicts trade in goods than trade in services.