Geography, Non-Homotheticity, and Industrialization: A Quantitative Analysis

Holger Breinlich and Alejandro Cunat

No 19, CeFiG Working Papers from Center for Firms in the Global Economy

Abstract: We propose a quantitative framework for the analysis of industrialization in which specialization in manufacturing or agriculture is driven by comparative advantage and non-homothetic preferences. Countries are integrated through trade but trade is not costless and geographic position matters. We use a number of analytical examples and a multi-country calibration to explain two important empirical regularities: (i) there is a strong positive correlation between proximity to large markets and levels of manufacturing activity; (ii) there is a positive correlation between the ratio of agricultural to manufacturing productivity and shares of manufacturing in GDP. Our calibrated model replicates these facts and also provides a better fit to cross-sectional data on manufacturing shares than frameworks which ignore the role of trade costs or non-homotheticity. We use the calibrated model to quantitatively analyze the effect of increases in agricultural productivity and a further lowering of trade barriers.

Date: 2012-12-01, Revised 2012-12-01
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Related works:
Journal Article: Geography, non-homotheticity, and industrialization: A quantitative analysis (2013)
Working Paper: Geography, Non-Homotheticity, and Industrialization: A Quantitative Analysis (2012)
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