|
Paul Krugman, who won the Nobel Price in Economics yesterday, relegated David Ricardo's "comparative advantage" theory of trade to the "dustbin of history" as they say.
Ricardo said, in the early 1800's, comparative advantage means a country that grows potatoes efficiently will grow them and export them, but import wool and mutton from another country that produces sheep most efficiently.
But why do many countries raise sheep and also import mutton? Why does the U.S. produce cars and also import them? Ricardo is irrelevant to modern trade. He explains nothing.
David Ricardo (18 April 1772 – 11 September 1823)
This is the WaPo explanation of Krugman's contribution to modernize Ricardo.
The theory suggested that trade could be defined by initial differences among countries. Some should specialize in industrial products because they have more labor, others in agricultural because of their location. Then they should trade with each other.
But that doesn't explain why, for instance, Sweden would come to both make cars and import them -- why countries that dominate trade have similar conditions and trade similar products. Krugman thinks that's because consumers prefer a diversity of products.
"It becomes advantageous for a country to specialize in manufacturing a specific car, and to produce it for the world market, while another country specializes in a different brand of car," the Swedish Academy wrote in a commentary that explained Krugman's work. "This allows each country to take effective advantage of economies of scale, thereby implying that consumers worldwide will benefit from greater welfare due to lower prices and greater product diversity, as compared to a situation where each country produces solely for its own domestic market, without international trade."
I published a piece by Ian Fletcher on October 10 that may go beyond Krugman. Fletcher discusses the Gomory-Baumol multiple equilibrium theory from 2000, and his own follow on deliberations.
Trackback(0)
 |
TrackBack URI for this entry
Subscribe to this comment's feed