Love for quality, comparative advantage, and trade

Abstract

We propose a Ricardian trade model with horizontal and vertical di¤erentiation, where willingness to pay for quality rises with individuals'incomes, and productivity di¤erentials across countries are stronger for high-quality varieties of goods. Our theory predicts that the scope for trade widens and international specialisation intensi…es as incomes grow and wealthier consumers raise the quality of their consumption baskets. This implies that comparative advantages strengthen gradually over the path of development as a by-product of the process of quality upgrading. The evolution of comparative advantages leads to speci…c trade patterns that change over the growth path, by linking richer importers to more specialised exporters.We provide empirical support for this prediction, showing that the share of imports originating from exporters exhibiting a comparative advantage in a speci…c product correlates positively with the importer's GDP per head.

Revealed comparative advantages and regional specialization: Evidence from Colombia in the Pacific Alliance

“…In the canonical Ricardian example, comparative advantages are determined by relative productivity. However, a country might have a comparative advantage with respect to its trade partners if it differentiates its products through quality, branding or post-sale customer service (Jaimovich & Merella, 2015). On the one hand, if for a given product k a country i has higher productivity with respect to some trade partners, k can be traded at a lower price and eventually exported.…”

Quality growth: from process to product innovation along the path of development

“…If some generic individual i decided to deviate to " i;1;q = 1, then he would generate a product innovation blueprint and sell it to a …rm for a payment i;1;q = (1 + ) =(1+ ) 1. 17 Given that when i sets " i;1;p = 1 he is o¤ered i;1;p = , the deviation to " i;1;q = 1 is actually not pro…table for him. 18 Next, we can also observe that a deviation to " i;1;q = 1 from " 1 = 0 cannot be optimal for a generic individual i in t = 1 either.…”

“…Step 3) When, alongside (16) and (17), also both (18) and (19) hold true, an equilibrium with " t = 0 also exists. When all the individuals alive in t set " t = 0, the expression in (10) applies, and thus Y t = 1+ R t 1 .…”

Trade, Luxury Goods, and a Growth-Enhancing Tariff

“…Models with an endogenous emergence of comparative advantages can be found, for instance, in Redding (1999), Fajgelbaum, Grossman and Helpman (2011) and Jaimovich and Merella (2015). …”