Comparative Advantage and Human Capital: A Cross-country Quantitative Analysis

Trade openness can affect welfare through changes in workers’ skill acquisition. We develop a multisector Eaton–Kortum model, in which skill intensities and on-the-job learning opportunities are heterogeneous across sectors. Workers decide whether to become skilled before entering the labor market and accumulate human capital on the job. Through the lens of our model, trade-induced sector reallocation changes the returns of becoming skilled and on-the-job learning opportunities. Our model allows for an analytical formula of the gains from trade. This formula is an augmented version of the ACR formula and includes gains due to changes in skill acquisition. Our calibrated model suggests that the gains from trade due to changes in skill acquisition are vastly different across countries and may be negative, with sizable gains for the United States, the United Kingdom, and India, as well as considerable losses for Germany, Brazil, and Argentina.