What Goods Do Countries Trade? a Quantitative Exploration of Ricardo’s Ideas

The Ricardian model predicts that countries should produce and export relatively more in industries in which they are relatively more productive. Though one of the most celebrated insights in the theory of international trade, this prediction has received little attention in the empirical literature since the mid-1960s. The main reason behind this lack of popularity is the absence of clear theoretical foundations to guide the empirical analysis. Building on the seminal work of Eaton and Kortum (2002), we offer such foundations and use them to quantify the importance of Ricardian comparative advantage. In the process, we also provide a theoretically-consistent alternative to Balassa’s (1965) well-known index of ‘revealed comparative advantage.’ Date: April 21, 2011. Affi liations and Contact information. Costinot: Department of Economics, Massachusetts Institute of Technology, [email protected]; Donaldson: Department of Economics, Massachusetts Institute of Technology, and CIFAR, [email protected]; Komunjer: Department of Economics, University of California at San Diego, [email protected]. Acknowledgments: We thank Gene Grossman, Gordon Hanson, Giovanni Maggi, Jim Rauch, Stephen Redding, Frédéric Robert-Nicoud, Bob Staiger, Kjetil Storesletten, Jonathan Vogel, Kei-Mu Yi, three anonymous referees, and seminar participants at many institutions for very helpful comments. We also thank Don Davis and Sam Kortum for stimulating discussions and precious advice at the Princeton IES Summer Workshop. Nadege Plesier provided excellent research assistance. This paper is a heavily revised version of the 2007 NBER working paper “What Goods Do Countries Trade? New Ricardian Predictions”. 1 A QUANTITATIVE EXPLORATION OF RICARDO’S IDEAS 1