Comparative Advantage and Heterogeneous Firms

Abstract: This paper examines how country, industry, and firm charcteristics interact in general equilibrium to determine nations' response to trade liberation. When firms possess heterogeneous productivity, countries differ in relative factor abundance, and industries vary in factor intensity, faling 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 industies, and magnify ex ante comparative advantage to creat additional welfare gains from trade. The improvements in aggregate productivity as countries liberalize dampen and can even reverse the real-wage losses of scarse factors.

Authors: Andrew B. Bernard; Stephen J. Redding; Peter K. Schott

Comparative Advantage and Heterogeneous Firms.pdf