2005), “Wealth as a Determinant of Comparative Advantage

This paper shows that a country’s wealth drives its comparative advantage when sectors in the economy face differential access to credit. Wealthier nations exhibit a comparative advantage toward goods produced in sectors facing more severe financial imperfections, typically smaller firms. Empirically this paper documents that those sectors are also labor intensive. Consequently this theory partially offsets traditional sources of comparative advantage and offers an explanation for Trefler’s missing trade mystery and the Leontief paradox. Furthermore, the theory makes the relation between trade and income distribution endogenous.