A Unified Model of Structural Adjustments and International Trade: Theory and Evidence from China
In this paper, we document seemingly puzzling patterns of structural adjustments in productions and exports based on a comprehensive Chinese firm level data: the overall manufacturing productions became more capital intensive while exports became more labor intensive during 1999-2007. To explain these findings, we embed Melitz-type heterogeneous firm model into the Dornbusch, Fisher and Samuelson’s (1980) continuum HO framework, which allows us to study interactions between changes in firm’s distribution within a sector and resource reallocations across sectors. Our theory predicts that export probability and export intensity decrease with capital intensity in the labor abundant country, while the opposit is true for the capital abundant country. And for industries that countries specialize, export probability and export intensity remain constant. These predictions are supported by the Chinese data.