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CEP discussion paper

Comparative Advantage and Heterogeneous Firms


This paper presents a model of international trade that features heterogeneous firms, relative endowment differences across countries, and consumer taste for variety. The paper demonstrates that firm reactions to trade liberalization generate endogenous Ricardian productivity responses at the industry level that magnify countries’ comparative advantage. Focusing on the wide range of firmlevel reactions to falling trade costs, the model also shows that, as trade costs fall, firms in comparative advantage industries are more likely to export, that relative firm size and the relative number of firms increases more in comparative advantage industries and that job turnover is higher in comparative advantage industries than in comparative disadvantage industries.


Andrew B. Bernard, Stephen Redding and Peter K. Schott

August 2004     Paper Number CEPDP0643

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This CEP discussion paper is published under the centre's Trade programme.