Modern Comparative Advantage “ Production Consumption possibility PCs(capital intensive outside ppc curve ExCu ms0s- consumption 山ara “ Social nu) production indifference Price ratio curves PCs (capital intensive
Modern Comparative Advantage PCs (“capital intensive”) Shoes (“labor intensive”) Price ratio “Production possibility curve” “Social indifference curves” production Consumption outside PPC consumption PCs (“capital intensive”) Shoes (“labor intensive”)
Modern Comparative Advantage Fervently believed in by most economists The principle of comparative advantage holds that each country will benefit if it specializes in the production and export of those goods that it can produce at relatively low cost. Conversely, each country will benefit if it imports those goods which it produces at relatively high cost. This simple principle provides the unshakable basis for international trade (Samuelson 300) Notwithstanding its limitations the theory of comparative advantage is one of the deepest truths in all of economics. Nations that disregard comparative advantage pay a heavy price in terms of their living standards and economic growth. "(308)
Modern Comparative Advantage • Fervently believed in by most economists: – “The principle of comparative advantage holds that each country will benefit if it specializes in the production and export of those goods that it can produce at relatively low cost. Conversely, each country will benefit if it imports those goods which it produces at relatively high cost. This simple principle provides the unshakable basis for international trade.” (Samuelson 300) – “Notwithstanding its limitations, the theory of comparative advantage is one of the deepest truths in all of economics. Nations that disregard comparative advantage pay a heavy price in terms of their living standards and economic growth.” (308)
Modern Comparative Advantage But model makes some extreme assumptions Full employment of all factors of production Otherwise countries would not be on"Production Possibility Frontier Costless mobility of factors of production between sectors Labour and capital can be moved from computer production to shoe production without loss of productivity Immobility of factors between countries Otherwise gains in one country would accrue to factor owners in another country Identical technology used in production everywhere Initially, even Samuelson admitted qualms about them
Modern Comparative Advantage • But model makes some extreme assumptions – Full employment of all factors of production • Otherwise countries would not be on “Production Possibility Frontier” – Costless mobility of factors of production between sectors • Labour and capital can be moved from computer production to shoe production without loss of productivity – Immobility of factors between countries • Otherwise gains in one country would accrue to factor owners in another country – Identical technology used in production everywhere • Initially, even Samuelson admitted qualms about them:
Modern Comparative Advantage The Ohlin analysis explains much; but there is much that it fails to explain; and if adhered to inflexibly, there is much that it can obscure. Its two central tenets are open to grave doubt Is it reasonable and useful to set up the hypothesis that production functions are the same the world over? Is it possible to find reasonably homogeneous and commensurable factors of production in diverse parts of the world so that relative proportions can be defined and compared? Certainly no strong affirmative answers to these two questions can be given-as Ohlin himself has pointed out in a number of places. The laws of nature may be the same " everywhere but the laws of nature and the economically relevant production function relating maximum output obtainable from specif ied concrete inputs are two quite different things. "(Samuelson 1948 International Trade And The Equalisation Of Factor Prices", Economic Journal Vol. 63) So maybe the" unshakable basis"isn't all that sound Let's consider the data
Modern Comparative Advantage • “The Ohlin analysis explains much; but there is much that it fails to explain; and if adhered to inflexibly, there is much that it can obscure. Its two central tenets are open to grave doubt: • Is it reasonable and useful to set up the hypothesis that production functions are the same the world over? Is it possible to find reasonably homogeneous and commensurable factors of production in diverse parts of the world, so that relative proportions can be defined and compared? • Certainly no strong affirmative answers to these two questions can be given—as Ohlin himself has pointed out in a number of places. The laws of nature may be the same “everywhere,” but the laws of nature and the economically relevant production function relating maximum output obtainable from specified concrete inputs are two quite different things…” (Samuelson 1948 “International Trade And The Equalisation Of Factor Prices”, Economic Journal Vol. 63) • So maybe the “unshakable basis” isn’t all that sound… • Let’s consider the data…