Countries which specialise

In the next section I test whether taking into account these two issues can bridge the gap between the contradicting evidence in the literature. I start by revisiting the evidence presented by Imbs and Warcziag To do so, I replicate their results using more recent data.

I limit the analysis to exports reported in the Harmonized System HS categorization, which goes up to six digits in terms of disaggregation, since until The final dataset has data for countries, which is based on the sample of exporter countries used in Hausmann et al. When it comes to concentration indexes, I limit the results of this note to the Herfindahl—Hirschman index HHI only, but results are robust for a number of different indexes.

Figure 2 visualizes the relationship between HHI and income per capital using exports data at the four digits level, following the IW methodology. The results are qualitatively consistent with those presented by IW: poor countries are highly concentrated, middle income countries are more diversified, and at high levels of development diversification stops and there is a re-specialization pattern.

Note: This figure estimates the non-linear relationship between export concentration using the Herfindahl-Hirschman Index based on four-digit HS categorization and PPP-adjusted income per capita.

The estimation follows the technique described in Imbs and Warcziag and it is explained in Appendix Section A. Next I explore the robustness of these results to two measurement peculiarities: the exclusion of natural resource rich countries and the level of disaggregation of the data used to compute concentration. Natural resource rich countries. Natural resource rich countries tend to be outliers in the income per capita versus concentration of exports relationship Bahar and Santos, How would these results be affected when excluding this set of countries?

I explore this question by reestimating the relationship between concentration and income per capita, following the same methodology as in IW, excluding from the sample countries for which the natural resource rents are, on average, at least 10 percent of their GDP throughout the years of the sample using data from the World Development Indicators. Figure 3 compares the concentration using four digit export data versus income relationship for all countries and for non-natural resource NNR countries in the data.

Note: This figure estimates the non-linear relationship between export concentration using the Herfindahl-Hirschman Index based on 4-digit HS categorization and PPP-adjusted income per capita.

The green line estimates the relationship for all countries and the orange line estimates the relationship for non-natural resource rich countries. The first thing that should be noticed is that, for all levels of income, NNR countries are on average less concentrated a result that is consistent with the findings of Bahar and Santos, However, more importantly, the re-specialization pattern, even if still present, is somewhat less pronounced for NNR countries only orange line.

More generally, without establishing the significance of these results, it is important to notice that the robustness of these results are dependent on the sample of countries used. Yet, I still find some pattern of re-specialization in NNR countries. In the next subsection, I explore whether the disaggregation level of the export data can play a role in explaining it.

Disaggregation level of export data. The level of disaggregation of exports data can play an important role in explaining the documented patterns. Because even if re-specialization occurs at higher levels of economic development, it might be only at highly aggregated sectors.

For instance, East Asian countries are concentrated in a few clusters, electronics being the most prominent one, but within such clusters there is wide diversification. Thus, the limitations of data as well as the conceptualization of what a sector actually is might bias the interpretation of the results.

I explore this by using in the same analysis concentration indexes computed using different levels of data disaggregation. Note: This figure estimates the non-linear relationship between export concentration using the Herfindahl-Hirschman Index based on two, three, and six digit HS categorization and PPP-adjusted income per capita.

For visualization purposes, the lines are moving averages. The results show that the re-specialization pattern at higher levels of income is much more pronounced the more aggregated data is used to compute the index.

This also holds true for NNR countries, as can be seen in Figure 5. Note: This figure estimates the non-linear relationship between export concentration using the Herfindahl-Hirschman Index based on two, three, and six digit HS categorization and PPP-adjusted income per capita, for non-natural resource rich countries. What are the implication of these results? It implies that while rich countries tend to concentrate in particular sectors, in terms of export varieties, they remain highly diversified, much more than poor countries.

As more disaggregated data is being used to compute the level of concentration, the re-specialization pattern documented by IW disappears. Thus, it might be the case that the re-specialization pattern that has been documented by IW is, in fact, that the process of growth is associated with the development of highly diversified clusters of economic activity.

If production is efficient, the economy can choose between combinations i. Production Possibilities Frontier : If production is efficient, the economy can choose between combinations on the PPF. Point X, however, is unattaible with existing resources and technology if trade does not occur. If the economy is operating below the curve, it is operating inefficiently, because resources could be reallocated in order to produce more of one or both goods without decreasing the quantity of either.

Points outside the curve are unattainable with existing resources and technology if trade does not occur with an outside producer. The PPF will shift outwards if more inputs such as capital or labor become available or if technological progress makes it possible to produce more output with the same level of inputs.

An outward shift means that more of one or both outputs can be produced without sacrificing the output of either good. Conversely, the PPF will shift inward if the labor force shrinks, the supply of raw materials is depleted, or a natural disaster decreases the stock of physical capital.

Without trade, each country consumes only what it produces. In this instance, the production possibilities frontier is also the consumption possibilities frontier. Trade enables consumption outside the production possibility frontier. This shows that in a free trade system, the absolute quantity of goods available for consumption is higher than the quantity available under autarky.

A country has an absolute advantage in the production of a good when it can produce it more efficiently than other countries. Absolute advantage refers to the ability of a country to produce a good more efficiently than other countries. In other words, a country that has an absolute advantage can produce a good with lower marginal cost fewer materials, cheaper materials, in less time, with fewer workers, with cheaper workers, etc. Absolute advantage differs from comparative advantage, which refers to the ability of a country to produce specific goods at a lower opportunity cost.

A country with an absolute advantage can sell the good for less than a country that does not have the absolute advantage. For example, the Canadian economy, which is rich in low cost land, has an absolute advantage in agricultural production relative to some other countries.

China and other Asian economies export low-cost manufactured goods, which take advantage of their much lower unit labor costs. China and Consumer Electronics : Many consumer electronics are manufactured in China. China can produce such goods more efficiently, which gives it an absolute advantage relative to many countries.

Imagine that Economy A can produce 5 widgets per hour with 3 workers. Economy B can produce 10 widgets per hour with 3 workers. Assuming that the workers of both economies are paid equally, Economy B has an absolute advantage over Economy A in producing widgets per hour. This is because Economy B can produce twice as many widgets as Economy B with the same number of workers.

Absolute Advantage : Party B has an absolute advantage in producing widgets. It can produce more widgets with the same amount of resources than Party A.

If there is no trade, then each country will consume what it produces. Adam Smith said that countries should specialize in the goods and services in which they have an absolute advantage. When countries specialize and trade, they can move beyond their production possibilities frontiers, and are thus able to consume more goods as a result.

A country has a comparative advantage over another when it can produce a good or service at a lower opportunity cost. In economics, comparative advantage refers to the ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another. Even if one country is more efficient in the production of all goods has an absolute advantage in all goods than another, both countries will still gain by trading with each other.

More specifically, countries should import goods if the opportunity cost of importing is lower than the cost of producing them locally. Specialization according to comparative advantage results in a more efficient allocation of world resources. Larger outputs of both products become available to both nations. Imagine that there are two nations, Chiplandia and Entertainia, that currently produce their own computer chips and CD players.

Chiplandia uses less time to produce both products, while Entertainia uses more time to produce both products. Chiplandia enjoys and absolute advantage, an ability to produce an item with fewer resources. However, the accompanying table shows that Chiplandia has a comparative advantage in computer chip production, while Entertainia has a comparative advantage in the production of CD players. The nations can benefit from specialization and trade, which would make the allocation of resources more efficient across both countries.

Comparative Advantage : Chiplandia has a comparative advantage in producing computer chips, while Entertainia has a comparative advantage in producing CD players. Both nations can benefit from trade.

It is important to distinguish between comparative advantage and competitive advantage. Though they sound similar, they are different concepts.

Unlike comparative advantage, competitive advantage refers to a distinguishing attribute of a company or a product. It may or may not have anything to do with opportunity cost or efficiency. We do not implement these annoying types of ads! Please add www. Select year Factoid The top nations for per capita imports and exports tend to be very small. Related Sectors. Retail Banking Insurance Payments.

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