On Tue, 23 May 2000, Max Sawicky wrote:
> The doctrine of comparative advantage has been criticized ad nauseum,
> including I believe by P. Krugman.
Oh no. He's all for it. His criticisms are that (1) it doesn't account for effects on income distribution within countries (the stolper samuelson effects), which is why it *always* predicts a gain from trade; and (2) that it doesn't account for economies of scale as a cause of trade; thus (3) it predicts more specialization than we in fact see in the real world, and (4) fails to predict that most trade takes place between similar nations. But when it comes to the article of basic faith that comparative advantage increases the economic pie, he's a believer. It's the first thing he discusses in the new edition of his textbook.
> As to comparative advantage, I'm afraid I have not the time to be
> brief. As the term suggests, it's about relative costs, not absolute
> ones.
Exactly.
> The idea that goods should be produced where they cost least to do so
> is not comparative advantage. It's absolute advantage.
I hestitate to object, since you are so much more learned in these matters, but this seems to be dead wrong, at least on Krugman's view. To quote Krugman on the classic Ricardian two-economy model, Home and Foreign, trading wine and cheese:
<quote>
In the example, Home is more productive than Foreign in both industries, and Foreign's lower cost of wine production is entirely due to its much lower wage rate. Foreign's lower wage rate is, however, irrelevant to the question of whether Home gains from trade. Whether the lower cost of wine produced in Foreign is due to high productivity or low wages does not matter. All that matters to Home is that is is cheaper *in terms of its own labor* for Home to produce cheese and trade it for wine that to produce wine for itself.
<endquote>
Michael
__________________________________________________________________________ Michael Pollak................New York City..............mpollak at panix.com