How Many Dimensions Do We Trade In? Product Space Geometry and Latent Comparative Advantage
This paper proposes a new quantitative implementation of Balassa's idea that export composition and revealed comparative advantage inform the relationship between endowments in domestic factors of production and exports. It proposes that the e...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2013/06/17840245/many-dimensions-trade-product-space-geometry-latent-comparative-advantage http://hdl.handle.net/10986/15838 |
| Summary: | This paper proposes a new quantitative
implementation of Balassa's idea that export
composition and revealed comparative advantage inform the
relationship between endowments in domestic factors of
production and exports. It proposes that the export
composition of countries is close to a low-dimensional
manifold or "Product Space" within the space of
export composition, which has as many dimensions as product
lines. The Product Space corresponds to a few latent
endowments explaining the structure of the trade matrix. The
model uses non-linear techniques to identify the product
space from the 2010 export matrix of 128 countries and 61
products, and to estimate the latent factors of endowments
by country. It formalizes a concept of latent comparative
advantage, which has practical country specific
applications, relevant for "trade competitiveness"
policies. Compared with classical revealed comparative
advantage, the model assesses how well countries are
matching their potential implied by the latent variables,
and also identifies products for which the latent advantage
is not yet revealed (extensive margin). The data suggests
that the degree of overlap between latent and revealed
advantage is a metric of "trade competitiveness." |
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