Productivity, Demand, and the Home Market Effect

Abstract

The causality between international trade and industrialization is still ambiguous. We consider a model of international trade with the Home Market E¤ect-with di¤erences in income and productivity between sectors and between countries-in order to identify additional channels for determining the e¤ects of international trade on industrialization. Introducing non-homothetic preferences and di¤erences in productivity aids in the interpretation of any apparent paradoxes within international trade, such as the commercial relations between more populated countries like China and India and large economies such as the U.S. Population size, demand composition and productivity levels constitute the three main channels for determining the e¤ects of international trade. Interactions among these channels de…ne the results obtained in terms of industrialization, while welfare levels are always higher in relation to autarky.

A New Class of Revealed Comparative Advantage Indexes

“…The three RCA indexes suffer from some drawbacks. First, the REA index ignores imports even though, like the RTA and RC indexes, using both export and import data makes it possible to "embody both the relative demand and relative supply dimensions (⋯) " of comparative advantages and therefore remain "consistent with the real world phenomenon of two-way trade" (Vollrath 1991, p. 276; see also Giraldo and Jaramillo 2018). According to Vollrath (1987), ignoring imports might be necessary because of the "noncomparability between import and export data which arises because the former contains certain handling, transportation, and spoilage costs not embedded into the latter" (p. 20).…”