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We thank Jagdish Bhagwati, Andrew Caplin, Ronald Findlay, Juha Kahkonen, Ritha Khemani, Jian Hai Lin and Peter Wickham for their comments on this paper. We are also grateful to Kenji Takeuchi and Koji Yanagishima who kindly provided us the data. The opinions expressed in this paper are those of the authors and do not necessarily reflect those of the IMF. The remaining errors are, of course, our own.
One can consider, for example, a case in which the government expands expenditure on education and vocational training to increase the skills of the labor force.
The intra-industry trade index is biased in the presence of a trade imbalance (Aquino, 1978). The bias caused by trade imbalance varies depending on the source, which makes the adjustment a difficult task. As there is no satisfactory way to deal with the bias, the conventional intra-industry index is utilized for empirical estimates.