The Evolution of Comparative Advantage: Measurement and Welfare Implications

Abstract

Using an industry-level dataset of production and trade spanning 75 countries and 5 decades, and a fully speciÞed multi-sector Ricardian model, we estimate productivities at sector level and examine how they evolve over time in both developed and developing countries. We find that in both country groups, comparative advantage has become weaker: productivity grew systematically faster in sectors that were initially at the greater comparative disadvantage. The global welfare implications of this phenomenon are significant. Relative to the counterfactual scenario in which an individual countryOs comparative advantage remained the same as in the 1960s, and technology in all sectors grew at the same country-specific average rate, welfare today is 1.9% lower at the median. The welfare impact varies greatly across countries, ranging from -0.5% to 6% among OECD countries, and from -9% to 27% among non-OECD countries. Remarkably, for the OECD countries, nearly all of the welfare impact is driven by changes in technology in OECD countries, and for the non-OECD countries, nearly all of the welfare impact is driven by changes in technology in non-OECD countries.