Three essays on international trade and fragmentation

Abstract

In this thesis, I develop a Ricardian model of comparative advantage in tasks of production, by modifying the Eaton and Kortum (2002) framework. I model fragmentation in a multiple-country setting, taking into account trade costs. The model is able to explain the large gap between bilateral gross trade and bilateral trade in value-added. Furthermore, I derive a gravity equation that captures fragmented production and trade within multiple countries, which is one of the first in the literature. Based on this framework, I show in Chapter 2 that the bias caused by ignoring fragmentation in the estimation of the gravity equation can lead to inaccurate estimation of both trade elasticity and the competitiveness of countries in a systematic way. Moreover, my model can explain the zeros in bilateral trade fl ows. In Chapter 3, I extend this framework to multiple sectors, to investigate the effect of fragmentation on the structural transformation of countries. I show that the model with international fragmentation can account for the observed trend of structural change much better, with the same underlining parameters.

Date of Award	2014
Original language	English
Awarding Institution	The Hong Kong University of Science and Technology