Trade and Sectoral Productivity

by Harald Fadinger and Pablo FleissUniversitat Pompeu Fabra

Discussion: Philip Sauré, Swiss Nationl Bank

Goal: Measure Total Factor Productivity by sector and country.

Idea: Infer relative sectoral TFP from the market shares of two countries in third (export) markets.

Motivation:

Ricardian comparative advantage is a corner stone of trade theory.

Differences in sectoral factor productivities are large and economically important.

Research estimating relative sectoral factor productivities has a long tradition, gains new momentum recently, and is not exhaustive.

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WB Trade, Production, and Protection

Broda and Weinstein (2006)

Rose (2004)Mayer and Zignago (2005)

UNESCOBernanke and Gürkaynak (2002)Barro and Lee (2001)Bils and Klenow (2000)

PWT Caselli (2005)

Romalis (2004)Barelsman et al (2000)

Imports of country i from country j in sector k

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…take ratios of import volumes.

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Productivity rations of countries A and B are estimated by the success of countries in exporting to third markets.

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Comments (Empirics)

How good is the fit to the (constructed) observations ?

“…Ricardian productivity differences are an important factor for explaining trade in goods.” (p. 25) and the corresponding Table IV.

Are the patterns of comparative advantage stable over the periods?

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Rose (2004)Mayer and Zignago (2005)

UNESCOBernanke and Gürkaynak (2002)Barro and Lee (2001)Bils and Klenow (2000)

PWT Caselli (2005)

Romalis (2004)Barelsman et al (2000)

Comments (Empirics)

• How good is the fit to the constructed observations?

“…Ricardian productivity differences are an important factor for explaining trade in goods.” (p. 25) and the corresponding Table IV

Are the patterns of comparative advantage stable over the periods?

• How reliable is the constructed (“raw productivity”)?

→ UNIDO Ind. Stat.: „…data of dubious legitimacy” (Trefler and Zhu AER (2000))

→ The measurement of capital stock.

→ ...

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Comments (Implications)

• Does the histograms reflect relative productivities of the averagedeveloping country? What do we conclude for trade policies?

• Find a “mostly negative relation between the relative sectoral TFP of developing countries and the sectoral skill intensity.” The implication for schooling in developing countries?

Comments (Method)

What’s new, what’s different?

• Harrigan (1997) – needs to assume zero transport costs.

• Eaton and Kortum (2002) Chor (2006)

“…Eaton-Kortum model requires the specification of a statistical distributionfor productivities, which makes it less general than our approach.” Not correct!

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Comments (General)

• Define relative TFP as “residual comparative advantage”

What about labor market rigiditiesfixed factorstrade in intermediatesnon-homothetic demand

Which errors do we expect from these omissions?

E.g. trade in intermediate goods increases volume, implying larger estimates of sectoral TFP.

• “…why should only the variable cost of production be taken into account?”

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Comments (Further Research)

Can the same method be applied to back out fixed cost?E.g. to fixed cost of exporting.

There may be a contribution to fixed cost of exporting.May think again about other models. Melitz (2003).

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Conclusion

Very important value added, clever technique.

A simple and very nice idea shows that we can back out relative productivities from trade (and other!) data.

…it’s good to know more about the measure of our (sectoral) ignorance.