I. Is comparative advantage still relevant today?

Comparative advantage: The theory behind measurement

by

Alan V. Deardorff¹

Three approaches that have been used empirically, each represented in this volume, are reviewed in this chapter to provide information about the patterns and causes of comparative advantage. Revealed comparative advantage, factor content of trade and the gravity model of trade each provide useful information, even if none of them is capable of fully delineating either the nature of comparative advantage or its causes. They can illuminate comparisons across countries that may be suggestive of directions for further research.

From the earliest days of economic science, economists have sought to explain why countries engage in international trade as well as what they trade - that is, which goods (and, more recently, services) they export and which they import. Fundamental to that understanding has been the concept introduced by Ricardo (1815) of comparative advantage. Ricardo recognized that, while differences in countries’ abilities to produce goods - productivity - lie at the heart of international trade, it is not absolute differences but relative differences that matter. That is, a country will not necessarily be unable to export a good just because some other country is able to produce it more efficiently, using less labour, say, per unit of output. If in spite of its low productivity in that particular good the country has even lower productivity in all others, then its wage will be low enough to offset its productivity disadvantage. It will export the good successfully (assuming costs of trade, such as transportation, are low enough that there is any trade at all).

This insight lies at the heart of much of the international trade theory that has appeared in the two centuries since Ricardo wrote. Other explanations of trade do exist (economies of scale, product differentiation, etc.) and undoubtedly help to explain the rich variety of international trade that exists in the world. But most advances in international trade theory have built upon, rather than dispensing with, the concept of comparative advantage. Most notably, the Heckscher-Ohlin theory of international trade due to Heckscher (1919), Ohlin (1933), and Samuelson (1948) elaborates the causes of comparative advantage in terms of factor endowments and factor intensities, thus giving a better understanding than Ricardo was able to provide of why countries have comparative advantage in the sectors that they do. Other researchers have gone on to identify, both theoretically and empirically, many other contributors to comparative advantage, going well beyond factor proportions.