Endogenous Comparative Advantage Research Articles

Global value chains and carbon emission reduction in developing countries: Does industrial upgrading matter?

Industrial upgrading and international collaboration in production have a vital impact on climate change globally. However, few studies have investigated the potential transmission role of industrial upgrading in the effect of participating in global value chains (GVCs) on carbon emissions. This study combines the value-added accounting method under the new trade accounting framework with the multi-regional input-output (MRIO) model to recalculate the real emissions embodied in trade for developing countries and investigate the relationships among GVC participation, industrial upgrading, and embodied emissions in different groups of countries identified using the fuzzy C-means clustering method. The empirical results show that the transforming and upgrading of industrial structure when participating in GVCs is conducive to easing the expansion of pollution emissions in developing countries such as Russia and Brazil, but the adjustment effect is relatively weak. The industrial structures of developing countries such as China and India face the dilemma of “low-end locking” when participating in GVCs, intensifying pressure on reducing carbon emissions domestically. The governments should promote low-carbon structural reform, cultivate endogenous comparative advantages, and promote the transformation from low-end to high-end product processing to break the path dependence on low-end locking in GVCs. This study provides a reference for governments of developing countries to effectively participate in the division and cooperation of production, conduct industrial upgrading, and reduce pollution emissions.

Endogenous Comparative Advantage*

AbstractWe develop a model of trade between identical countries. Workers endogenously acquire skills that are imperfectly observed by firms; therefore, firms use aggregate country investment as the prior when evaluating workers. This creates an informational externality interacting with general equilibrium effects on each country's skill premium. Asymmetric equilibria with comparative advantages exist even when there is a unique equilibrium under autarky. Symmetric, no‐trade equilibria can be unstable under free trade. Welfare effects are ambiguous: trade can be Pareto‐improving even if it leads to an equilibrium between rich and poor countries, with no special advantage regarding country size.

Endogenous comparative advantage, gains from trade and symmetry-breaking

Similar countries often choose very different policies and specialize in very distinct industries. This paper proposes a novel mechanism to explain policy diversity between similar countries from an open economy perspective. I study optimal policies in a two country model where policies affect the determinants of trade patterns. Symmetric countries choose asymmetric policies in equilibrium if aggregate income is sufficiently convex in own policy. Such high social increasing return to policy, despite constant returns to scale in production, generate enough gains from trade to sustain policy diversity in equilibrium. Any asymmetric equilibrium is welfare-improving compared to the common autarky optimum. Similarly, a more asymmetric Nash equilibrium Pareto dominates a less asymmetric one. As an application, I consider a model in which the government's choice of education policy affects skill distribution and comparative advantage. In this application, the existence of an asymmetric Nash equilibrium in education policy requires that the elasticity of the education cost of agents with respect to skill is relatively low.

Access to credit and comparative advantage

AbstractAccess to external funds is crucial for the entry and expansion of entrepreneurial firms and the sectors they predominantly arise in. This paper reports three important results. First, comparative advantage is shaped by factor endowments as well as fundamental determinants of corporate finance. In particular, a larger equity ratio of firms and tough governance standards relax financing constraints, lead to entry of firms at the lower bound of the productivity distribution and create an endogenous comparative advantage in sectors where entrepreneurial firms are clustered. Second, a small degree of protection in the constrained sector can raise a country's welfare by relaxing financing constraints if terms‐of‐trade effects are small. Third, a small degree of protection of the financially dependent industry in a financially underdeveloped country might even raise world welfare.

Monitoring, endogenous comparative advantage, and immigration

Abstract We propose a theory of free movement of goods and labor between two economies in the presence of moral hazard. Each country produces two final goods where the productive efforts of workers cannot be perfectly observed, or verified only in the complex industry. We show that national institutional quality and the system of the early childhood care and education determine the pattern of international trade. However, individuals’ decisions to emigrate depend only on the national institutional quality, where the country with more developed institutions serves as the host country of immigrants. We conclude that international labor movement promotes international trade. JEL classification: B52, I21, F10, F16, F22, J24.

Endogenous Comparative Advantage, Gains From Trade and Symmetry-Breaking

Endogenous Comparative Advantage, Gains From Trade and Symmetry-Breaking

Division of Labor and Endogenous Comparative Advantage: A Smith-Ricardian Model of International Trade

This paper develops a Smith–Ricardian model that incorporates division of labor into the continuum-good Ricardian model of Dornbusch et al. (1977). The tradeoff between the efficiency gain and coordination cost in production determines the efficient level of division of labor. Consequently, the traditional comparative advantage becomes endogenous. The model is able to explain how the recent progress in information technology (IT) would affect the efficient level of division of labor and competitive margin. In particular, we show that absolute advantage in division of labor and relative labor supply play a crucial role in determining the different effects of universal IT progress on a country’s competitive margin in international trade.

Why do Similar Countries Choose Different Policies? Endogenous Comparative Advantage and Welfare Gains

Similar countries often choose very different policies and specialize in very distinct industries. This paper proposes a mechanism to explain policy diversity among similar countries from an open economy perspective. I study optimal policies in a two country model when policies affect determinants of trade patterns. I show that welfare gains from trade can provide sufficient incentive for asymmetric equilibrium policies, even if the two countries have identical economic fundamentals. Any asymmetric equilibrium exhibits greater production specialization than the common autarky optimum; this is the source of welfare gains. For this same reason, a more asymmetric Nash equilibrium Pareto dominates a less asymmetric one. I characterize necessary and sufficient conditions for existence of such asymmetric equilibrium. All equilibria are asymmetric if income is sufficiently convex in policy, and production technologies and consumer preferences are not strongly biased in favor of one of the factors of production. As an application, I consider a model where skill distribution is the determinant of trade patterns and the policy in question is education policy. When heterogeneous agents choose their skill levels optimally, optimal skill function is convex in government policy. In this application, the general sufficient condition requires that the education cost of agents is relatively inelastic with respect to skill.

Global competitiveness measurement for the tourism sector

International tourism is expected to be a major vehicle of economic development in industrializing countries in the twenty-first century. Countries with tourism-based economies must develop approaches for employing their comparative advantages to achieve competitive advantages. However, competitiveness in the tourist industry is multi-dimensional and complex. This study proposes that the competitiveness of a tourist destination should be composed of (1) Ricardo's comparative advantages (RCA), including the conditions of natural endowments (exogenous comparative advantages) and the degree of technological change (endogenous comparative advantages); (2) Porter's competitive advantages (PCA), explaining the increase in trade among countries with similar factorial portfolios than in trade pattern determination; (3) tourism management, providing high-quality education and training to enhance RCA and PCA; and (4) environmental conditions, including the domestic and the global environmental conditions. Analytic hierarchy process is employed to weight these evaluation dimensions, elements, and indicators in the proposed tourism competitiveness measuring model, and application discussions are also given.

Contracts and Technology Adoption

We develop a tractable framework for the analysis of the relationship between contractual incompleteness, technological complementarities, and technology adoption. In our model, a firm chooses its technology and investment levels in contractible activities by suppliers of intermediate inputs. Suppliers then choose investments in noncontractible activities, anticipating payoffs from an ex post bargaining game. We show that greater contractual incompleteness leads to the adoption of less advanced technologies, and that the impact of contractual incompleteness is more pronounced when there is greater complementary among the intermediate inputs. We study a number of applications of the main framework and show that the mechanism proposed in the paper can generate sizable productivity differences across countries with different contracting institutions, and that differences in contracting institutions lead to endogenous comparative advantage differences. (JEL D86, O33)

Economic Development, International Trade, and Income Distribution

This paper applies the inframarginal analysis, which is a combination of marginal and total cost-benefit analysis, to investigate the relationship between division of labor, the extent of the market, productivity and inequality of income distribution. The model with transaction costs and exogenous and endogenous comparative advantages shows that as trading efficiency is improved the general equilibrium discontinuously jumps from autarky to partial division of labor with a dual structure, then to the complete division of labor where dual structure disappears. In this process different groups of individuals with different trading efficiency become involved in a certain level of division of labor at different stages of development. As the leading group becomes involved in a higher level of division of labor leaving others behind, a dual structure emerges and inequality increases. As latecomers catch up dual structure disappears and inequality declines. When the leader goes to an even higher level of specialization, dual structure occurs and inequality increases again. Inequality decreases again as the latecomers catch up. Hence, the equilibrium degree of inequality fluctuates in this development process. The relationship between inequality and productivity is neither monotonically positive nor monotonically negative. It might not be an inverted U-curve. The key driving force of economic development and trade is improvement in trading efficiency.

Pattern of Trade and Economic Development in a Model of Monopolistic Competition

The paper introduces differences in production and transaction conditions between countries into a model of monopolistic competition. It applies inframarginal analysis to show that, as transaction conditions are improved, the general equilibrium may jump discontinuously across different patterns of trade and economic development. A country may export a good in which it has exogenous comparative disadvantage if its endogenous comparative advantage dominates this disadvantage. Countries will choose a trade and development pattern to utilize their net exogenous and endogenous comparative advantages in production as well as in transactions.

Globalization, dual economy, and economic development

This paper applies inframarginal analysis, which is a combination of marginal and total cost-benefit analysis, to a model with both constant returns and increasing returns in production. It demonstrates that as transaction conditions are improved, the general equilibrium discontinuously jumps from autarky to partial division of labor with a dual structure, then to the complete division of labor where the dual structure disappears. Two types of dual structure may occur in the transitional stage of economic development and globalization. One of them involves the division of labor in the developed economy and autarky in the less developed economy, generating increasing disparity of per capita real income between the two types of economies. The other involves a domestic dual structure in the less developed economy, where the population is divided between a commercialized sector that trades with a foreign country and a self-sufficient sector that is not involved in trade. All gains from trade go to the developed economy. This paper shows that deterioration of a country's terms of trade and an increase of gains that this country receives from trade may concur, provided productivity progress from an expanded network of division of labor outpaces the deterioration of terms of trade. In the model with both endogenous and exogenous comparative advantages, a country may export a good with exogenous comparative disadvantage if endogenous comparative advantage dominates this exogenous comparative disadvantage. Implications of the findings for China's WTO membership and China's trade policy are explored.

A Ricardian Model with Endogenous Comparative Advantage and Endogenous Trade Policy Regimes

This paper develops a Ricardian model with transaction costs and endogenous and exogenous comparative advantages. It shows that the level of division of labour and trade increases as transaction conditions improve. It identifies the conditions for trade negotiations that result in zero tariff rates and the conditions for the coexistence of unilateral tariff protection and unilateral laissez faire policies. The model may explain the policy transformation of some European governments from Mercantilism to laissez faire in the 18th and 19th century and policy changes in developing countries from protection tariff to trade liberalization and tariff negotiation.

Endogenous Comparative Advantages in Developing Economies

This paper focusses on endogenous comparative advantages in developing countries, in particular on labour reallocation from low-productivity informal sectors into high-productivity formal sectors. This mechanism is important for two reasons. First, it contributes to the growth potential of developing countries and the absorption capacity for further capital accumulation. Second, labour reallocation will keep developing economies specialized in low-skilled intensive products in the coming decades and it will keep the wages of low-skilled workers low. We analyse this mechanism by simulating an increase in the skill intensity of developing countries the coming decades. These simulations are carried out with WorldScan, a dynamic AGE model of the world economy. An increasing skill intensity in LDCs will stimulate the global supply of high-skilled intensive products more than the supply of low-skilled intensive products, but to a much lesser extent than one would expect in static analyses or in absence of informal sectors.

A NEW THEORY OF DEMAND AND SUPPLY AND EMERGENCE OF INTERNATIONAL TRADE FROM DOMESTIC TRADE

Abstract. In the paper a fixed learning cost is introduced into a framework with consumer‐producers and transaction costs. The fixed learning cost yields a rate of return on the investment in individual specific learning and training which is increasing in its rate of utilization. Division of labor can avoid duplicated learning costs and generate economies of specialized learning. The tradeoff between economies of specialization and transaction costs can be used to explain concurrent increases in the extent of the market, aggregate demand, productivity, trade dependence, the degree of market integration, the degree of production concentration, diversity of economic structure, variety of different professions, each person's level of specialization, and the extent of endogenous comparative advantage and the emergence of international trade from domestic trade. This model explains demand and supply as two sides of the level of division of labor which is determined by a transaction cost coefficient. Hence, the demand law may not hold even for normal goods owing to complicated interdependencies between the level of specialization and demand and between the level of specialization and prices of traded goods. The extended version of this model with the CES function is used to endogenize variety of consumption in addition to the endogenization of individuals’level of specialization.

Endogenous vs. exogenous comparative advantage and economies of specialization vs. economies of scale

This paper draws the distinctions between the concepts of endogenous and exogenous comparative advantages and between the concepts of economies of specialization and scale. A comparison between the equilibrium model endogenizing the degree of specialization and endogenous comparative advantages, neoclassical trade model with exogenous comparative advantages, and an extended Dixit-Stiglitz model with a tradeoff between economies of scale and transaction costs is used to explore the equilibrium implications of the distinctions.

A Microeconomic Mechanism for Economic Growth

This paper constructs a dynamic general equilibrium model in which economic growth is explained by the evolution of the division of labor. The relationships among the accumulation of human capital, the evolution of the division of labor, endogenous comparative advantage, trade dependence, the market structure, and economic growth are investigated.