Trade in intermediate goods and the division of labor

This paper develops a model of international trade based on the division of labor and comparative advantage. Labor is used to produce traded intermediate inputs which are used in the production of traded final goods. Large countries gain relatively more from comparative advantage than from the division of labor, while the opposite is true for small countries. Large countries export a smaller share of final goods and a larger share of intermediate goods than small countries. These predictions find supportive evidence in the data.