Ricardian selection

We analyze the foundations of the relationship between trade and average productivity in the Ricardian model. Under broad assumptions about the autarky distributions of industry productivities, trade openness raises average productivity. This is due to the selection effect of international competition – driven by comparative advantage – which makes “some” high- and “many” low-productivity industries exit the market. We derive a model-based measure of this effect that requires only production and trade data. For a sample of 41 countries, we find that Ricardian selection raised average productivity in the manufacturing sector by 11% above the autarky level in 2005 (6% in 1985), with a neat positive time trend and large cross-country differences.