The China Deal: If You Can't Sell It, Buy It

[Max Sawicky]

[mbs] I don't see that the quote contradicts what I said.
K is using a one-factor model, so wages = costs.  He makes
clear that trade does not hinge on absolute advantage,
meaning whether the cost of a unit of wine or cheese
is less in one nation or the other.  It depends on
comparisons of what wine and cheese trade for within
each country, which is relative cost in my lingo. As
long as the ratios differ, it will pay one country to
specialize in wine, the other in cheese.

For instance, suppose I can get a wheel of cheese for a
bottle of wine in 'home', and two wheels for a bottle
in 'foreign.'  I'm in 'home' and I can buy a wheel &
a bottle, 2 wheels, or 2 bottles.  Since variety is
the spice of life I want some of each.  Should I
buy the wine or the cheese from 'home'?  I should
buy two bottles and send one to 'foreign,' in
return for two wheels of cheese.  If I bought
two wheels at home the most I could get for one of them
is a bottle at home or a half-bottle from 'foreign.'
It doesn't pay to make cheese in 'home.'

Now it could be that you need one worker in
'home' to produce a bottle or a wheel, and
three and six in 'foreign' to produce a wheel
and a bottle, respectively.  The home worker
earns a bottle/wheel for his work (no profits
in this model), and the foreign workers earn
a third of a wheel/sixth of a bottle.  But
the absolute differences have no bearing on
trade.  A worker in either country benefits
from specialization and trade, regardless of
their wage rate (tho in this example the
foreign party to the trade is merely held
harmless; is indifferent between buying
a bottle from foreign or home).

Assuming away a whole lot of other things.
In this model, labor cannot be traded --
only products; and there is no capital or land.
Etc. etc.

mbs


>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
. . .
> The idea that goods should be produced where they cost least to do so
> is not comparative advantage. It's absolute advantage.

MP:
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