Unpacking Sources of Comparative Advantage : A Quantitative Approach

This paper develops an approach for quantifying the importance of different sources of comparative advantage for country welfare. To explain patterns of specialization, I present a multi-country trade model that extends Eaton and Kortum (2002) to predict industry trade ows. In this framework, comparative advantage is determined by the interaction of country and industry characteristics, with countries specializing in industries whose specific production needs they are best able to meet with their factor endowments and institutional strengths. I estimate the model parameters on a large dataset of bilateral trade ows, presenting results from both a baseline OLS approach, as well as a simulated method of moments (SMM) procedure to account for the prevalence of zero trade ows in the data. I apply the model to explore various quantitative questions, in particular how much distance, Ricardian productivity, factor endowments, and institutional conditions each matter for country welfare in the global trade equilibrium. I also illustrate the shift in industry composition and the accompanying welfare gains in policy experiments where a country raises its factor endowments or improves the quality of its institutions.Comparative Advantage, bilateral trade flows, Gravity, Ricardian model, Factor Endowments, institutional determinants of trade, simulated method of moments

A re-examination of the role of foreign direct investment and exports in Malaysia's economic growth : a time series analysis,1970-2006

The main objective of this study was to re-examine the role of foreign direct investment(FDI)and port Malaysia's economic growth over the period of 1970 to 2006.The Johansen and Juselius(1990) cointegration test was used to investigate the presence of a long-run equilibrium relationship between economic growth and its determinants. Besides, the vector error correction model (VECM) and the Granger (1969) causality test were used to examine the short-and long-run causality direction between the relevant variables. The empirical results revealed that economic growth and its determinants were cointegrated. The Dynamic OLS results suggested that FDI and exports were positively related to economic growth. In addition,the Granger causality results strongly supported bilateral causality between economic growth and its determinants. This indicated that FDI and exports contribute to Malaysia’s economic growth. In fact, high economic growth will also cause FDI and export-orientated industries to grow rapidly

Institutions, Wages and Inequality : The Case of Europe and its Periphery (1500-1899)

This paper explores the long-run relationship between institutions and wage outcomes in Europe and its periphery. I find that cities that exercised stronger institutional protection of private property experienced : (i) higher levels of both skilled and unskilled real wages, as well as (ii) lower levels of inequality as measured by the skilled-unskilled wage ratio. While the first result corroborates existing work on the positive growth effects of better institutions, the second finding is more novel to the literature. Some explanations are proposed for how stronger institutions can cause an increase in the relative supply of skilled workers, thus lowering wage inequality.institutions, Wage inequality, European cities

Subsidies for FDI: Implications from a Model with Heterogeneous Firms

This paper analyzes the welfare e®ects of subsidies to attract multinational corporations, in a setting where ¯rms are heterogeneous in their productivity levels. I show that the use of a small subsidy raises welfare in the FDI host country, with the consumption gains from attracting more multinationals exceeding the direct costs of funding the subsidy program through a tax on labor income. This welfare gain stems from a selection e®ect, whereby the subsidy induces only the most productive exporters to switch to servicing the host's market via FDI. I further show that the welfare gain from a subsidy to variable costs is larger than from a subsidy to the ¯xed cost of conducting FDI, since a variable cost subsidy also raises the ine±ciently low output levels stemming from each ¯rm's mark-up pricing power.FDI subsidies; heterogeneous firms; fixed versus variable cost subsidies; import subsidies.

Subsides for FDI : Implications from a Model with Heterogeneous Firms

This paper analyzes the welfare effects of subsidies to attract multinational corporations, in a setting where firms are heterogeneous in their productivity levels. I show that the use of a small subsidy raises welfare in the FDI host country, with the consumption gains from attracting more multinationals exceeding the direct costs of funding the subsidy program through a tax on labor income. This welfare gain stems from a selection effect, whereby the subsidy induces only the most productive exporters to switch to servicing the host's market via FDI. I further show that the welfare gain from a subsidy to variable costs is larger than from a subsidy to the fixed cost of conducting FDI, since a variable cost subsidy also raises the ineciently low output levels stemming from each firm's mark-up pricing power.FDI subsidies, Heterogeneous Firms, fixed versus variable cost subsidies, import subsidies

Subsidies for FDI: Implications from a Model with Heterogenous Firms

This paper develops a two-country version of the Helpman, Melitz and Yeaple (2004) model with heterogenous firms to analyze the welfare effects of subsidy schemes to attract multinationals. Considering policies financed by a tax on labor income, I show formally that the use of a small cost subsidy by the host country to multinational firms raises welfare in that country. This welfare improvement stems from a selection effect: The subsidy attracts the most productive home country exporters to switch to servicing the foreign market via FDI, allowing foreign consumers to access these firms' products at a lower price by saving on cross-border transport costs. This consumption gain to the foreign country outweighs the direct costs of funding the subsidy precisely because it is the most productive home country exporters that respond to the FDI subsidy. Some benchmark calibrations show that the magnitude of the welfare gains from a subsidy to variable costs is substantially larger than from a subsidy to the fixed cost of conducting FDI. Intuitively, a variable cost subsidy also helps to raise the inefficiently low output levels of each firm stemming from their mark-up pricing powerFDI subsidies, heterogenous firms

Unpacking Sources of Comparative Advantage: A Quantitative Approach

This paper develops an approach for quantifying the importance of different sources of comparative advantage for country welfare. To explain patterns of specialization, I present a multi-country trade model that extends Eaton and Kortum (2002) to predict industry trade ows. In this framework, comparative advantage is determined by the interaction of country and industry characteristics, with countries specializing in industries whose specific production needs they are best able to meet with their factor endowments and institutional strengths. I estimate the model parameters on a large dataset of bilateral trade flows, presenting results from both a baseline OLS approach, as well as a simulated method of moments (SMM) procedure to account for the prevalence of zero trade fl ows in the data. I apply the model to explore various quantitative questions, in particular how much distance, Ricardian productivity, factor endowments, and institutional conditions each matter for country welfare in the global trade equilibrium. I also illustrate the shift in industry composition and the accompanying welfare gains in policy experiments where a country raises its factor endowments or improves the quality of its institutions.Comparative advantage, bilateral trade ows, gravity, Ricardian model, factor endowments, institutional determinants of trade, simulated method of moments

The stability of money demand function in Japan: Evidence from rolling cointegration approach

The main purpose of this study is to re-investigate the stability of Japanese M2 money demand function over the period of 1960:Q1 to 2007:Q2. This study propose to incorporate the rolling regression approach into the bounds testing procedure for cointegration within the autoregressive distributed lag (ARDL) framework to search for the stability of money demand function in Japan. This study, in general, confirms that real M2 money demand and its determinants, real income and interest rates are cointegrated within the entire sample period. In line to that, the CUSUM and CUSUM of Squares tests show that the money demand function is stable over the analysis period. However, the evidence of rolling ARDL cointegration test implies that Japanese M2 money demand is not stable due to a series of changes in the Japanese monetary policy environment. The finding of this study is vital for policymakers in formulating an appropriate macroeconomic policy. Owing to the low power of CUSUM and CUSUM of Squares tests in the presence of lagged dependent variable(s), this study propose to use the rolling cointegration test to re-investigate the stability of money demand function in Japan.Money Demand; Rolling Cointegration Test; Japan; Stability

Off the cliff and back? Credit conditions and international trade during the global financial crisis

Ministry of Education, Singapore under its Academic Research Funding Tier