Implied Comparative Advantage
CID Working Paper No. 276
Ricardo Hausmann, Cesar A. Hidalgo, Daniel P. Stock,
Muhammed A. Yildirim
Ricardian theories of production often take the comparative advantage of locations in different industries to be uncorrelated. They are seen as the outcome of the realization of a random extreme value distribution. These theories also do not take a stance regarding the counterfactual or implied comparative advantage if the country does not make the product. Here, we find that industries in countries and cities tend to have a relative size that is systematically correlated with that of other industries. Industries also tend to have a relative size that is systematically correlated with the size of the industry in similar countries and cities. We illustrate this using export data for a large set of countries and for city-level data for the US, Chile and India. These stylized facts can be rationalized using a Ricardian framework where comparative advantage is correlated across technologically related industries. More interestingly, the deviations between actual industry intensity and the implied intensity obtained from that of related industries or related locations tend to be highly predictive of future industry growth, especially at horizons of a decade or more. This result holds both at the intensive as well as the extensive margin, indicating that future comparative advantage is already implied in todays pattern of production.
JEL Codes: F10, F11, F14, O41, O47, O50
Affiliated Research Program: Growth Lab