Demand Shocks, Sector-level Externalities, and the Evolution of Comparative Advantage

Daniele Verdini ()
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Daniele Verdini: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)

No 2019007, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: Does production size play any role in industrial productivity? And how important is its contribution to the evolution of comparative advantage over time? In this paper, I develop a multi-country multi-sector general equilibrium model of trade characterized by the presence of inter-temporal sector-level externalities. The model makes explicit the mechanism linking size and productivity and delivers at the equilibrium a dynamic gravity model of trade that can be empirically tested. I structurally estimate the dynamic scale parameter by exploiting exogenous demand shocks uncorrelated to any supply-side component of production. Results show that industrial production scale can be a potential source of comparative advantage, with an estimated average dynamic scale parameter of 0.18. However, potential gains are heterogeneous, with values ranging between 0.12 and 0.20 across different industries.

Keywords: International Trade; Dynamic Comparative Advantage; Sector-level Externality; Demand Shocks (search for similar items in EconPapers)
JEL-codes: D62 F11 (search for similar items in EconPapers)
Date: 2019-03-24
New Economics Papers: this item is included in nep-int
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2019007

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