Measuring comparative advantage

Given this theoretical underpinning, one might have hoped that the measurement of comparative advantage would be straightforward. In fact it is not, and for reasons that are readily understood from the theory. The best definition of comparative advantage is in terms of autarky relative costs, and of course these are almost always impossible to observe, since countries have long been engaged in trade.4 Observable relative costs in the presence of trade either have been equalized as a result of trade, as in Figure 1.2, or they differ as a result of trade costs in ways that primarily indicate those costs. Therefore direct observation of relative costs has seldom been successful as a measure of comparative advantage.5

Several other approaches have therefore been used, none of which get exactly at comparative advantage, but each of which is nonetheless informative in various useful ways. The approaches taken in the subsequent chapters of this volume illustrate this diversity, and they will be discussed here individually. They are: revealed comparative advantage; factor content of trade; and the gravity model of trade.

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