DP4622 Comparative Advantage and Heterogenous Firms

Author(s): Andrew B. Bernard, Stephen J. Redding, Peter K. Schott
Publication Date: September 2004
Keyword(s): entry and exit, Heckscher-Ohlin, inter-industry trade, international trade, trade costs
JEL(s): F11, F12, L11
Programme Areas: International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4622

This Paper presents a model of international trade that features heterogeneous firms, relative endowment differences across countries, and consumer taste for variety. The Paper demonstrates that firm reactions to trade liberalization generate endogenous Ricardian productivity responses at the industry level that magnify countries’ comparative advantage. Focusing on the wide range of firm-level reactions to falling trade costs, the model also shows that, as trade costs fall, firms in comparative advantage industries are more likely to export, that relative firm size and the relative number of firms increases more in comparative advantage industries and that job turnover is higher in comparative advantage industries than in comparative disadvantage industries.