Quality differentiation, comparative advantage, and international specialization across products

Abstract

This paper introduces quality differentiation into a Ricardian model of international trade following Costinot (2009a). It shows (1) how quality differentiation can help industrialized countries to be active across the full board of products, complex and simple ones, while developing countries systematically specialize in simple products, in line with novel stylized facts. (2) Quality differentiation may thus help to explain why richer countries tend to be more diversified and why, increasingly over time, rich and poor countries tend to export the same products. (3) The analysis reveals a novel supply-side channel through which quality differentiation can increase the gains from inter-product (industry) trade for developing countries relative to industrialized countries.