Abstract
This chapter argues that the Ricardian trade theory’s small-scale general equilibrium characteristics are helpful in understanding the complex world economy and in uncovering some of the misconceptions of the globalization debate. First, it is shown that the main predictions of the model seem roughly in line with empirical observations regarding the pattern of trade and relative wages. Second, it is explained why countries do not compete in the way companies do and that wage comparisons between the North and the South that focus on export industries are misguided. Third, the model is applied to the topical question of how an improvement in productivity abroad affects the home country.
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Notes
- 1.
This does not mean that an inquiry into the discriminatory effects of a preferential trade agreement on a third country may not be interesting. Note that this is typically done using the so-called Gravity Model in order to explain and estimate (changes in) bilateral trade volumes.
- 2.
Note that the variables which refer to the foreign country are denoted with an asterisk (*).
- 3.
Note that a LI */a LI > a LK */a LK also implies a LI */a LK * > a LI /a LK and thus that Home has a comparative advantage in I relative to good K. This is a fortiori true for good 3 relative to good K and for good 2 or 1 relative to K. This is why we can call inequality (5.1) as the chain of decreasing comparative advantage.
- 4.
If there would be small international transaction costs, those goods in the middle of the chain would be produced by both countries and remain nontraded (see Chap. 4).
- 5.
- 6.
- 7.
These are the industries for which data was available for the most recent year (2014): Textiles (D13), Wearing Apparels (D14), Wood Products (D16), Paper Products (D17), Printing Products (D18), Coke and Refined Petroleum (D19), Rubber and Plastic Products (D22), Non-Metallic Mineral Products (D23), Basic Metals (D24), Fabricated Metal Products (D25), Computer, Electronic and Optical Products (D26), Electrical Equipment (D27), Machinery and Equipment (D28), Motor Vehicles and Trailers (D29), Other Transport Equipment (D30), Furniture and Other Manufacturing Products (D31).
- 8.
- 9.
We have chosen these variables in units per hour as this measure is close to the Ricardian model and also because countries typically differ in the number of hours worked per week by a full-time employee.
- 10.
See Costinot et al. 2012, p. 582) who estimate these gains of about 5% of the total gains from trade in their cross-country analysis based on 1997 data.
- 11.
See, e.g., Sax and Weder (2009) for an empirical analysis of the Swiss case.
- 12.
Some commentators have argued that wages of the industrial country, Germany, were too low during the aftermath of the Euro crisis of 2008. The low wages would be responsible for the large German trade surplus and for the difficulties of other countries within the Euro zone to export to Germany or compete with German exports on other markets. They required that German wages should be raised (by government order). The counter-arguments from the perspective of the Ricardian model are that, first, wages will rise in Germany in the long term if they are indeed below productivity. Second, the other members of the Euro zone have to ensure that nominal wages can fall after having eliminated the natural adjustment through exchange rate realignments.
- 13.
See Antweiler, Copeland, and Taylor (2001) in their thought-provoking and fundamental paper with the title “Is Free Trade Good for the Environment? ”.
- 14.
This point has also been emphasized by Krugman et al. (2015, pp. 300 ff.).
- 15.
See Eq. (4.10) in Chap. 4.
- 16.
Krugman (1994) writes: „One can, of course, take the position that words mean what we want them to mean, that all are free, if they wish, to use the term “competitiveness” as a poetic way of saying productivity, without actually implying that international competition has anything to do with it.” (p. 35).
- 17.
- 18.
Note, that this is in line with our argument above that w* increases by proportionally less than a*(z) falls.
- 19.
As mentioned by Samuelson (2004, p. 140) the foreign country could, in principle, lose if the price of its export good falls enough—a well-known phenomenon described as “Self-Immiseration” or “Self-Immiserizing Trade”. This has, according to Samuelson (2005, p. 243), been “made cogently” by Johnson (1955) and Bhagwati (1958).
- 20.
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Weder, R. (2017). The Ricardian Trade Model: Implications and Applications. In: Jones, R., Weder, R. (eds) 200 Years of Ricardian Trade Theory. Springer, Cham. https://doi.org/10.1007/978-3-319-60606-4_5
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