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Capabilities, Wealth, and Trade

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  • John Sutton
  • Daniel Trefler

Abstract

We explore the relation between a country's income and the mix of products it exports. Both are simultaneously determined by countries' capabilities, that is, by countries' productivity and quality levels for each good. Our theoretical setup has two features. (1) Some goods have fewer high-quality producers/countries than others, meaning that there is comparative advantage. (2) Imperfect competition allows high- and low-quality producers to coexist. These two features generate an inverted-U, general equilibrium relationship between a country's export mix and its GDP per capita. We show that this inverted-U permeates the international data on trade and GDP per capita.

Suggested Citation

  • John Sutton & Daniel Trefler, 2016. "Capabilities, Wealth, and Trade," Journal of Political Economy, University of Chicago Press, vol. 124(3), pages 826-878.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/686034
    DOI: 10.1086/686034
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    References listed on IDEAS

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    1. Eric A. Verhoogen, 2008. "Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(2), pages 489-530.
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    5. Richard Baldwin & James Harrigan, 2011. "Zeros, Quality, and Space: Trade Theory and Trade Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 60-88, May.
    6. Peter K. Schott, 2003. "One Size Fits All? Heckscher-Ohlin Specialization in Global Production," American Economic Review, American Economic Association, vol. 93(3), pages 686-708, June.
    7. Hallak, Juan Carlos & Sivadasan, Jagadeesh, 2013. "Product and process productivity: Implications for quality choice and conditional exporter premia," Journal of International Economics, Elsevier, vol. 91(1), pages 53-67.
    8. Julian di Giovanni & Andrei A. Levchenko, 2012. "Country Size, International Trade, and Aggregate Fluctuations in Granular Economies," Journal of Political Economy, University of Chicago Press, vol. 120(6), pages 1083-1132.
    9. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-1721, September.
    10. Jonathan Eaton & Samuel S. Kortum & Sebastian Sotelo, 2012. "International Trade: Linking Micro and Macro," NBER Working Papers 17864, National Bureau of Economic Research, Inc.
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    JEL classification:

    • N0 - Economic History - - General

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