Firm heterogeneity and ricardian comparative advantage within and across sectors

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This paper incorporates Melitz's Econometrica (71:1695-1725, 2003) heterogeneous-firm trade model in the Ricardian model of comparative advantage with a continuum of sectors introduced by Dornbusch et al. (Am Econ Rev 67(5), 823-839, 1977). In particular, we characterise the equilibrium outcomes when neither sectors nor countries are symmetric. We find that trade patterns can follow Ricardian comparative advantage, while wage rates are proportional to market size due to a home market effect. Interestingly, trade liberalisation hurts the large country but benefits the small one by reducing the number of sectors with two-way trade and expanding those with specialised (one-way) trade.

Original languageEnglish
Pages (from-to)533-559
Number of pages27
JournalEconomic Theory
Issue number3
Publication statusPublished - 2009 Mar 1



  • Comparative advantage
  • Heterogeneous firms
  • Home market effect
  • Intra-industry trade
  • Trade liberalisation
  • Wage

ASJC Scopus subject areas

  • Economics and Econometrics

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