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...[ Read more ]

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.