ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 940
I consider how heterogeneity in capital goods affects international trade patterns, and I show a novel source of comparative advantage: the magnitude of capital goods heterogeneity. Capital goods are heterogeneous in their vintage and productivity, and due to capacity constraints, only productive capital goods are activated in the equilibrium. Through this selection, the distribution of capital goods determines the industry-level productivity: industry-level productivity is higher in an industry with relatively larger variation in capital goods, and hence in a perfectly competitive two-country, two-good, two-factor equilibrium, the industry has Ricardian comparative advantage. An extension of the model, including fixed trade cost, describes a sorting situation in which the most productive production units (which are generally newer vintage) export, the moderately productive units serve the domestic market, and the least productive units (older) do not operate.
Ricardian trade model Putty-clay technology Vintage capital Capacity utilization rate Sorting in destination