Geography, non-homotheticity, and industrialization: A quantitative analysis

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Geography, Non-Homotheticity, and Industrialization: A Quantitative Analysis Terms of use: Documents in AbstractWe propose a quantitative framework for the analysis of industrialization in which specialization in manufacturing or agriculture is driven by comparative advantage and nonhomothetic 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. JEL-Code: F110, F120, F140, O140.

Love for quality, comparative advantage, and trade

“…4 In this regard, an important feature present in our model is that high-quality versions of goods are inherently more tradable than low-quality ones, while this is not necessarily the case in Fajgelbaum et al (2011) unless they speci…cally assume quality-speci…c trade costs that are restricted to be relatively lower for high-quality varieties. technological disparities.…”

“…In particular, in our model, comparative advantages and trade emerge gradually, not because trade costs may initially hinder the scope for exchange in the presence of increasing returns to scale, but because the demand for commodities displaying wider heterogeneity in cost of production (the high-quality goods) expands as incomes rise. 4 Jaimovich and Merella (2012) also propose a nonhomothetic preference speci…cation where budget reallocations take place both within and across horizontally di¤erentiated goods. That paper, however, remained within a standard Ricardian framework where absolute and comparative advantages are determined from the outset, and purely by technological conditions.…”

“…Consider a representative individual (in a generic country) with income w. The consumer's problem requires maximising (3) subject to (4). This is a problem that could be in principle solved in terms of physical quantities of consumption for each good.…”

“…This transformation comes at no loss of generality since the result derived here would obtain even without such transformation. 34 Suppose that preferences, while retaining the same structure across goods, are for each good now represented by the sub-utility index: Individuals choose the optimal values of quality and consumption to maximise that utility function subject to (4). There, the pricing function in terms ofq z;v becomes: …”

Geography, market potential and industrialization in Italy 1871–2001

“…Our specification of foreign market potential (Equation ) has been often used, since it has a strong explanatory power, and yields results very similar to those of more complex indices designed to estimate trade costs on the basis of trade gravity equations (Breinlich ). In particular, by using a specification for FMP as in Equation (), Breinlich and Cuñat () found a strong positive correlation between proximity to large markets and levels of manufacturing activity in a large sample of countries. In other words, proximity to markets for products matters for industrialization, so Equation () can be considered as a centrality index.…”