Comparative advantage and heterogeneous firms

Andrew B. Bernard, Stephen J. Redding, Peter K. Schott

Research output: Contribution to journalArticlepeer-review

413 Scopus citations

Abstract

This paper examines how country, industry, and firm characteristics interact in general equilibrium to determine nations'responses to trade liberalization. When firms possess heterogeneous productivity, countries differ in relative factor abundance, and industries vary in factor intensity, falling trade costs induce reallocations of resources both within and across industries and countries. These reallocations generate substantial job turnover in all sectors, spur relatively more creative destruction in comparative advantage industries than in comparative disadvantage industries, and magnify ex ante comparative advantage to create additional welfare gains from trade. The improvements in aggregate productivity as countries liberalize dampen and can even reverse the real-wage losses of scarce factors.

Original languageEnglish (US)
Pages (from-to)31-66
Number of pages36
JournalReview of Economic Studies
Volume74
Issue number1
DOIs
StatePublished - Jan 2007
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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