Abstract
The present paper reinterprets the comparative cost principle of David Ricardo in the light of the present global economy. Specifically, Ricardo’s inequalities of comparative advantage, based on the famous four coefficients of unit labor requirement (and four related ratios), allow two different, though mathematically equivalent, inequalities. One is the inter-industrial inequality and the other is the intra-industrial inequality. The former represents the view points of policy makers or capitalists making macroscopic choices on appropriate industrial structures and investments, while the latter represents industrialists or shop floor people, making microscopic efforts for improving productivity and surviving the international, inter-factory competition. We can here observe a micro-macro loop between microeconomic individual efforts and macroeconomic processes. Thus, despite the apparent mathematical equivalence of the two inequalities, the conceptual difference is much more profound and meaningful than ordinarily supposed. Ricardo himself did discuss both interpretations in his work, but today’s mainstream economics tend to rely too much on the former when it explains the benefit and consequence of comparative advantage. We believe that, by re-emphasizing intra-industrial views, we can re-establish a more balanced understanding of comparative cost principle for describing and analyzing contemporary trade phenomena. We anticipate that Ricardo’s 19th century theory of comparative advantage will increase its importance in the globalized economy in the 21st century.
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Fujimoto, T., Shiozawa, Y. Inter and Intra Company Competition in the Age of Global Competition: A Micro and Macro Interpretation of Ricardian Trade Theory. Evolut Inst Econ Rev 8, 193–231 (2012). https://doi.org/10.14441/eier.8.193
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DOI: https://doi.org/10.14441/eier.8.193
Keywords
- comparative advantage
- global competition
- inter-factory competition
- micro-macro loop
- Ricardian trade theory