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1. 8. 2016.
Competing Gains From Trade
Differences in growth rates across countries imply a strong relation between factor-proportions-based trade and key aggregate economic outcomes. We construct two macro-trade datasets and illustrate that this relation is rather weak empirically. Employing a dynamic two-country model, we propose a simple explanation for this finding. By limiting the substitutability between domestic and foreign tradable varieties, the presence of intra-industry trade implies that pronounced trade specialization patterns culminate in a loss of varieties. Accordingly, intra-industry trade acts to suppress inter-industry trade dynamics, thus realigning the behavior of standard models with the empirical evidence.