Capabilities, Wealth and Trade

This paper re-explores the relation between a country’s level of wealth and the mix of products it exports. We argue that both are simultaneously determined by countries’ capabilities i.e. by countries’ productivity and quality levels for each good. Our theoretical setup has two features. (1) Some goods have fewer high-quality producers/countries than others i.e. there is Ricardian comparative advantage. (2) Imperfect competition allows highand low-quality producers to coexist, which we refer to as ‘product ranges.’ These two features generate a very particular non-monotonic, general equilibrium relationship between a country’s export mix and its GDP per capita. We show that this non-monotonicity permeates the international data on trade and GDP per capita.