Country size, per-capita income, and comparative advantage: services versus manufacturing

The paper develops a trade model with novel implications that richer and larger nations have a comparative advantage in manufacturing, while poorer and smaller nations have comparative advantage in services. Two forces drive these results: non-homothetic tastes that cause demand to shift toward services as income increases; and services having a higher degree of product differentiation than manufacturing, which leads larger nations to shift their production more towards manufactures. Empirical analysis using data from 2005 through 2016 finds support for the theoretical predictions: per-capita income and nation size have positive relationships with manufacturing comparative advantage indices and negative relationships with services comparative advantage indices