It is true that export success depends on comparative advantage and international competitiveness, but these are relative terms: international competitiveness is bought at the expense of the competitiveness of others, and comparative advantage implies a near-monopoly position in the provision of some good or service.
Comparative advantage is not about what you are better at compared to other people. That is absolute advantage. Comparative advantage is what you are better at doing relative to the other things that you could be doing. And as such it greatly strengthens the case for trade.
Or as I put it some time ago:
The result of this idea is that it is never possible for there not to be gains from the specialisation of labour and the resultant trade. It’s also, as Samuelson points out, something which is grossly and widely misunderstood.
It is that it doesn’t matter how good or bad I am at anything compared to how good you are at any and every thing. That isn’t the comparison we are thinking should be made. The comparison is between how good I am at doing things and how good I am at doing other things. The specialisation I choose, the work that is divided to me, should be what it is that I am least bad at.
Think of the extended family barbecue, there will be the idiot cousin there. No, really, every family has one (and as with poker, if you don’t know who the mark is at the table then it’s you) but do we, when preparing the garden feast, insist that said idiot do nothing? Everyone else there is better at everything: including the patting of mince into hamburger patties. So should Fred (no, I don’t have a Cousin Fred) be told to do nothing, not even shape patties? No, that isn’t usually what we do, Fred does the thing which he is least bad at, even though he’s worse at everything than everyone else, and pats shredded cow into shape. We thus get meat that goes into buns as well as all of the other necessities, the coleslaw, the ribs, the Pimms and the cucumber sandwiches for later (for we’re certainly not going to let Fred near either flames or sharp edges, not after that barbecuing the cat on the embers of the gazebo last year) . Fred has added to the wealth, the production, through this specialisation and division of labour, as Smith said he would, and done so by doing what he is least bad at as Ricardo pointed out he should.
Comparative advantage is best understood as us specialising in whatever it is that we do least badly. And that requires no near-monopoly in anything at all.
the near-monopoly position bit is puzzling. Isn’t a canonical example of comparative advantage wine and cloth, and aren’t there lots of wine producing countries?
Isn’t it the case that while balanced trade following the principle of comparative advantage would be beneficial to all parties (even those which have a general absolute disadvantage), free trade actually proceeds according to absolute advantage and thus results in chronic trade surpluses and deficits?
comparative advantage gives more time to the person who is best at both things to produce even more of what they are best at. Resulting in more wealth for both parties when the goods from both parties are finished and exchanged.
Tim,
Comparative advantage is about doing what you do best, yes, but if someone else does the same thing better you still lose out. I said comparative advantage AND competitive advantage. You need both.
Unfortunately someone took your criticism to mean that my entire post was invalid – which is distinctly odd as the comparative advantage bit really doesn’t matter and could easily be omitted. The post is about the zero-sum nature of international trade – for me to be able to sell, someone somewhere has to be wiling to buy. And therefore the sheer idiocy of the (unfortunately rather prevalent) idea that mercantilism is the way to global economic prosperity. Since you are a fan of trade (as am I), I presume you agree with me on that?
Luis,
Spanish wine is not the same as French wine. The best producers of Spanish wine are Spanish. A better example might be Cheddar cheese, maybe?
There are some basic economic principles that no matter how many times you explain them, however clearly and in however many inventive new ways, people just don’t get. Comparative advantage is one of them. Subjective value is another. You get to the end of the explanation and the immediate reply is, “Yes I get that, but…” which actually means they haven’t got it at all.
Your post doesn’t actually contradict Coppola’s statement that “comparative advantage implies a near-monopoly position in the provision of some good or service”.
In Ricardo’s wine and cloth example, because Portugal has a comparative advantage in the production of wine and England has a comparative advantage in the production of cloth, Portugal ends up producing wine and England ends up producing cloth. So in this example the result is Portugal has “a near-monopoly position in the provision of” wine, and England has “a near-monopoly position in the provision of” cloth.
> Frances
Following comparative advantage,
it is not true that if someone does the same thing better then you still lose out.
Here is a worked example
http://www.truefreetrade.org/comp.htm
Frances,
I do not think the idiosyncrasies of national wines give producers that much monopoly power. Certainly when I go to the supermarket I regard them as almost perfect substitutes.
I dislike the opening comment in her post which is that global trade is a “zero sum” game. Of course exports = imports. So what. But zero sum usually means that one side has a gain (or loss) that is exactly matched by the other side’s loss (or gain). But in trade every transaction is not zero sum in this sense. Both parties gain because they are selling something or buying something at a price which they are both happy to receive or pay. So I would call it ” win win”.
Comparative advantage is a tough one, so tough that even I am not convinced it works in practise.
If we lived in a world of fixed prices (and slightly less importantly major restrictions on global movement of capital and people) then yes, comparative advantage. We don’t, so therefore not comparative advantage. As Greece is demonstrating.
To use the barbeque example, we can get Frank to spend an hour making bad patties or I can spend 20 minutes making good ones. In a world of fixed (above market-clearing) patty prices, having Frank make them is a net benefit provided that 1 hour of Frank’s time is worth more than 20 minutes of mine plus the quality gap. However, once we have technology (capital) or cheaper labour (immigration), patty prices are low enough for me to get good ones for ≤19 minutes pay and Frank is out of a job doing even that which he does least worst.
Another way of putting it is, if we can meet global demand (distinct from desire) using absolute advantage, and still have hundreds of millions of potentially productive persons milling around doing nothing, comparative advantage is no longer very much of an advantage. And I think we are definitely well beyond that point.
And to extend Ms Coppola’s contention, us Jerries will always prefer a tiny amount of quality domestically-produced stuff over unlimited quantities of foreign crap. That however fails to explain the penny-pinching price-sensitive German consumer.
@Ian B
quite right. I think John Kay nails it “The Truth about Markets”:
“Our instinct is always to ask “Who is the best person for this job?”, but it is a mistaken instinct. We need instead to ask “Who should be doing this job, bearing in mind his or her productivity in a variety of other jobs, and also the productivity of other people who might be doing this job instead of the variety of other jobs that they currently are or might be doing?””
And more profoundly:
” People, areas of the world, regions exist, and have rights and values, independently of their economic function. Businesses exist only for their economic function: and if they have no economic function they have no reason to exist. So households and countries must do what they are best at, whether or not they do it better than other other households or countries. Businesses should only do what they can do better than others.”
So Moldova can continue to produce wine although they might not have achieved the sophistication of France or Australia. If they can find people to sell the wine to, they are quids in.
@Diogenes,
Maybe that is what we should be thinking, in a collective, nationalist kind of way, and maybe it’s the way the world did work when we could keep everyone busy and then some. The way we think now is “me, my family, my business etc”. Looking at “national” economies is old hat.
Thus when I hire someone, I really do want the best person for that job. That is my selection criterion. Of the 5 people I spoke to, will you do this job the best?
Because I am interested in the success of my business and not in the success or lack of of the nation or of the people I don’t hire, I am not interested in hiring the second best candidate on the basis that the first one has something else they would be even better at while the second best does not. I will take the selfish decision to hire the best and deprive some other sector of his or her skills. Comparative advantage dies in a global free market where we don’t have enough work for everyone to do.
So one country’s surplus is another country’s deficit, and it’s absurd to want all countries to be in surplus at once.
The theory of Comparative Advantage is true is so far as it goes. But it’s revealing that Ricardo couldn’t think of a good practical example, and had to use purely hypothetical numbers. In reality, Portugal had a big absolute advantage over England in wine production, because its climate was so much better suited to it, and England had a big absolute advantage over Portugal in cloth production, because the dark satanic mills of the industrial revolution were in England not Portugal.
Comparative Advantage works well when there’s a limited resource which could be assigned to the production of various goods. For example, it might be best to farm cows on lowland farms and sheep on upland farms, because there’s only so much low land. It applies poorly in practice to Dinero’s example of widgets and gadgets, because in reality industrial production uses little labour and a country’s production of widgets and gadgets will be limited by demand not by labour availability.
More people come to the barbeque, but we still only need a cook, a patty maker, a stoker, a salad maker, a bun slicer, someone to stop the cat getting fried, and an uncorker of wine bottles (Spanish, French and Moldovan). All the tasks get assigned to the individual who does it most efficiently and everyone else remains unemployed.
No Phillippe, Portugal does not have “a near-monopoly position in the provision of” wine because France, Spain and Australia also exist. Just because examples used to each CA use only two countries does not mean CA says countries will have near monopolies in what they trade.
As George Carty and James say above
It hard for comparative advantage to operate in practice as the economy and importation decisions are fragmented across the decisions of individual importers , who just place a contract with whoever can do it at the lowest price in their sector of interest.
JamesV
exactly – businesses work for competitive/absolute advantage. vSo hire and fire to get the best people you can – from the available resource pool.
Countries and households can only aspire to relative/comparative advantage – am I making the best use of my abilities, given that I am not a world-beater in any field.
Actually, there is a case when it pays the group not to have Fred do anything. This is when his contribution, whatever it is, is actively destructive. Eg, you ask him to make the patties and put them on plates and he flushes the patties down the loo and breaks the crockery.
Paradoxically, this is likely not to apply to Fred the village idiot who is probably most keen to please, but rather to Fred the lazy, who wants not to be asked to do anything. It is a strategy I have adopted many times in order to increase time quaffing Pimms for example. The trick being not to be too obvious so that people become resentful.
The scenario would probably not apply to countries, although certain South American countries seem to be heading in that direction.
The amount of Not Getting It in this thread is mesmerising. It’s not even worth going over it again, for the reason I explained above. Honestly people, there are explanations of it all over the web. Read them until you get it. Come to that, just read Tim’s example until you get it.
/patronising mode
Coppola surely gets it wrong from the very beginning: International Trade is not a zero-sum game. If it were, it would be impossible for international trade to increase.
Leaving aside the confusion about comparative and absolute advantage – even super clever economics types get it wrong – the real offence is in the term “international competitiveness” which is an absolutely mercantilist term that implies competition is at the level of the nation not at the level of the firm or individual. It’s in the same box of ghastly nonsense as “the global race” and “British jobs for British workers”.
Nautical Nick,
Yes, I agree it is not strictly a zero-sum game because the absolute volume of international trade can of course increase. But this is a macroeconomic post. The existence of trade surpluses implies the existence of trade deficits: for one country to increase its trade surplus requires other countries to increase their deficits. Increasing the volume of international trade makes no difference to this. At the national level, it is zero-sum.
Simon,
If you had bothered to read my post you would have discovered that mercantilism was exactly what I was objecting to.
Jesus, what a piss-poor article. This would have received an “F” even in the first year of my Economics degree.
in before >”Muh work experience! Muh MBA!”
As this example has amply demonstrated, an MBA does not prevent you from repeating the most elementary economic fallacies. Fuck me! Another one of those bizarro-world threads where IanB is the only fucking one talking any kind of sense.
This is a fascinating discussion of comparative advantage, but in your enthusiasm for microeconomic examples, most of you have missed the macroeconomic point. What I was attacking in my post is the (unfortunately all too prevalent) idea that countries should aim to run trade surpluses. Mercantilism is alive and well, and as idiotic as ever.
Richard Allan,
Do you have anything useful to contribute? Like for example explaining in exactly what ways my article is “piss-poor”? If not, you really should STFU.
@Ian B,
Indeed, there are a lot of us that don’t get it; Which presumably is why it is neither obvious nor trivial.
I think we get it in theory, but think it only applies in certain worlds, and we don’t inhabit such a world; if we ever did.
Frances>
It’s cute that you think your post was attacking mercantilism, rather than paying it a passing glance in the middle of a strange stream of non sequiturs and errors.
To make some constructive criticism, can I suggest that in future, every time you write a declarative statement, you check that it is in fact true? Not only would you be more likely to restrict yourself to those which are, although that’s hardly guaranteed, but the effort of checking might make you realise just how extreme the surplus of them in your writing is.
Dave,
You have completely misunderstood, then. The entire post was about mercantilism. Never mind, I’m writing another post in which I shall explain this one in much simpler language that even you might be able to understand.
Frances>
If various people are telling you that your post doesn’t say what you think it says, have you considered that perhaps the flaw is in your communication? I understand that you meant to demonstrate that mercantilism is wrong, but you seem to have spent rather more time demonstrating that you are.
It’s really not that hard a subject to explain, so I suppose there’s some distinction in cocking it up as badly as you have. We’ve all flubbed from time to time when we were young and inexperienced in our trades, but the question is whether you keep denying what everyone’s telling you, or accept it and use it as a learning experience.
I was going to dissect your post line by line to show you what you’re doing wrong, but then I came to my senses and realised that if I’m going to tutor you, I might as well charge for it.
Dave,
“Various people” have wasted a lot of energy on a microeconomic argument that is not remotely what the post is about, based upon Tim’s criticism of one sentence that wasn’t really important to the post and could easily have been omitted.
I’m very glad that you have decided not to demonstrate your ignorance of macroeconomics by trying to dissect my post. It would have been embarrassing – for you.
Frances
my take would be what role cvan a government play in this. Individuals give their labour to companies that pay them more thaqn they could earn elsewhere.
In turn, companies sell in markets where their products have an advantage. these markets could be internal or external.
What can a government do to influence these things? If it turns out that every company in China can make something that gweilos want at tht price point but Chinese people don’t, why should the Chinese government stop them?
I was initially thrown by the “comparative advantage” stuff, but if you ignore it then everything seems to make sense.
If someone said “International trade is a zero-sum game” then I would look at them oddly, but it is immediately clarified by “Across the globe as a whole, exports = imports.” From “If one large trading area” onwards, I found the article very clear, so I don’t understand some of the attacks here.
What really concerns me is the below. Do the Americans have things like Cornish Cruncher? Surely the British comparative (and absolute) advantage in taste results in the best cheddar producers being British? Or have I misunderstood the comment?
“Spanish wine is not the same as French wine. The best producers of Spanish wine are Spanish. A better example might be Cheddar cheese, maybe?”
Martin Wolf wrote an excellent column about the Euro in which he said something along the lines “Germany can only be Germany if the rest of Europe is Not”.
Regardless of the fascinating discussion about comparative advantage “yawn”, I think Frances point is right. The entire world cannot export their way to prosperity. To run trade surpluses someone must run a trade deficit. Until we can export to Mars or the Moon it seems to me that all countries cannot run trade surpluses. Yes of course I appreciate that if Australia runs a trade surplus in Iron Ore and Coal while Japan runs a trade surplus in Cars and TVs and the countries export to each other it can all net out to zero but that doesn’t seem to be the way the world actually works.
Frances>
““Various people” have wasted a lot of energy on a microeconomic argument that is not remotely what the post is about”
Not what the post was intended to be about. And lots of energy wasted on other things the post wasn’t about, as well as the particular point Tim happened to pick up on. Whose fault is is if people haven’t understood what you said? Theirs?
You remain oblivious to what the criticism is actually about, which is that you blathered endlessly and obscurely on a simple subject, and at the end of it had said nothing new or enlightening. Your writing style is prolix, dreary, and otiose.
If you want people to understand you, you need to make it less of a chore for them to do so. If you want to attract readers to your blog, you need to go further than that and learn to write succinctly and entertainingly.
Off topic, but related. Can anyone help me terminologically? I’m trying to remember the posh jargonistic term for a physical or mathemetical system that will run away if disturbed, as opposed to one that is self-stabilising. That is, a system like a pencil balanced on end, and if you even slightly disturb it, it falls over, or runs away to infinity.
Anyone?
Ian B: metastable equilibrium. You’re welcome.
JamesV-
I think the thing is that CA is one of those basic general economic observations like Say’s Law. SL says that in an economic order there can’t be a general overproduction. CA says that that in an economc order, there cannot be a situation in which some unit- a nation, region, village or individual- cannot do anything economically productive. There is no situation in which, say, there are 10 villages and 9 are producing everything and 1 is left with nothing to do.
Which means that if you think you are seeing that (or a general overproduction), something else is to blame, which might be e.g. State intervention, or some particularly strong sticky effects on labour redeployment, or something like that.
PaulB:
Thanks, but I’m looking for the opposite, when it’s meta-unstable, but I’m sure that’s not the right term. I’m having one of those mental block things.
Acksherly, looked at that way, this had never occurred to me directly before, CA and SL are paraphrasings of each other.
And that leads us perhaps to an inadvertent flaw in Tim’s BBQ example; it implies a saturation of production. It might be taken that there are only a limited number of burger jobs, and limited demand for burgers, so there may be no work for cousin Fred. I don’t think Tim is saying that btw, merely that that is one reading of the example.
But Fred isn’t limited to burger jobs. He can clear plates. He can put on a clown costume and entertain the children. He can run a disco. He can always extend productive output by thinking up something that adds value that wouldn’t otherwise exist and, he should do the thing he is best at, even if the guy who is best at chopping vegetables is also a better DJ or clown.
There’s a lot of commentary on here attacking Frances for writing a sensible post about the absurdity of wanting all countries to run a positive balance of trade. It seems to me that her third sentence disimproves the post, but it’s only one sentence. And if I were tempted to lecture her about how to write, I should bear in mind which of us is a popular online commentator on macroeconomics.
More generally, a lot of misunderstandings occur on the internet somewhere between the writer and the reader. A reader is often mistaken if he assumes that any inanity he perceives comes solely from foolishness in the mind of the writer.
One question for the self-proclaimed experts on Comparative Advantage: what are the goods in whose production Germany has an absolute advantage over Greece, but Greece has a comparative advantage over Germany, and which Germany therefore imports from Greece? This is a genuine question; I’d be interested to know.
Well, it would be anything that Germany are importing from Greece. But maybe Greece don’t export to Germany much, but may export to some other country, who export to Germany, and so on. It would require a lot of probably pointless statistical analysis to try to ascertain that answer, which would probably be inconclusive due to the huge complexity of the real economy. Which is the thing which frustrates all econometrics, which is why the most scientific school of economics (the Austrian School) rejects econometrics as equivalent to entrail divination and sticks to working with principles (praxeology).
The other point is that if Germany has an absolute advantage over Greece in the making of tea towels, but Greece has the comparative advantage, and thus Germany imports Greek tea towels, you wouldn’t have a statistic telling you that the Germans have the absolute advantage, because not only are no such statistics compiled, it would be impossible to compile them, as there is no exposed data. You’d have to forcibly prevent Greek tea towel exports (and indeed everybody else’s) thus forcing Germany to make their own tea towels, in order to see if they’re more effiicient at it than the Greeks or not.
German tea-towel importers buy their tea towels from whichever supplier is selling them cheapest this week, One week the supplier might be Greek the other Chinese.
Please, someone, come up with a real example. As I said we live in a world where prices are (more or less) free, all costs have to be ultimately borne by the customer, and far from having resource constraints we have them (especially unskilled labour) in such abundance that we don’t use all of them. This makes it really hard for anyone to make stuff and sell it and stay in business when there is a competitor who can do the same thing at lower absolute cost.
Even if any other use of that company’s or country’s or village’s resources would be even less productive the lack of competitiveness means they do actually end up doing nothing. Go look at any dole queue anywhere in the western world. If comparative advantage works why are these people not harvesting wheat fields with sickles? After all, it’s the least worst thing they can do, the fact that it;s absolutely cheaper to get one man with a combine to do it doesn’t seem to matter in the world of comparative advantage.
James V
So, for a real world example, we need two countries that trade two goods, in which one has an absolute advantage in producing both goods over the other, yet both gain from trade.
Another text book example could be computers designed in the USA and flowers grown in Kenya. If you believe that flower farms in the USA are absolutely more productive then Kenyan ones, that qualifies. Note that this does NOT mean that flowers grown in the US would be Cheaper. Nobody has yet mentioned the key question of price determination. Return to your test books people. Flowers from Kenya would have to b cheaper otherwise the US would not choose to import them. They key idea is that things can be cheaper if imported from an absolutely less productive country, indeed it spis the fact that the country is less productive that explain why prices are that way.
If I wreathed my desk I could supply research papers that estimate Ricardian gains from global trade
Oh spell checker you vex me
Note also there is no connection I can see between idea of comparative advantage and incoherent idea that all countries should aim for trade surplus
If Kenyan flowers are cheaper then Kenya has an absolute advantage in flower production.
James V No no no. Productivity is about physical production processes, comparative advantage is about productivity. Prices are another matter. You have misunderstood the idea. Honestly, go look at a text book.
The Kenyan farmer’s input costs are lower than the American’s. It matters not a jot that he is using dollar-a-day labour rather than the expensive kit the American farmer uses), he is still securing an absolute advantage over the yank by doing it more cheaply.
CA contends that the Kenyan farmer can have higher input costs (and hence higher prices for flowers) than the yank farm would but still stay in business, ultimately because the yanks stop flower farming and go do something more productive instead.
I concede, again, this works in a world of full employment, resource scarcity that kept most people just above starvation levels, and essentially devoid of arbitrage opportunities. Ricardo’s mercantilist world was far closer to such than ours is.
James I am sorry but that’s all kinds of wrong, go look at a text book.
Luis, you are so convincing.
> Luis Enrique
the worked examples I have read price the productivity in items per hour.
Are you extending the concept by bringing in prices and saying that for it to work in a trading enviroment the least efficient party has to have less hourly pay.
You want me to do it for you?
Well, I am in a good position to do so, because I am sat in an economics department and I used to teach trade theory to undergrads.
Right, you claim “If Kenyan flowers are cheaper then Kenya has an absolute advantage”.
So you think that an example of comparative advantage should have flowers being more expensive when bought from the trading partner than when bought domestically, otherwise that would be absolute not comparative advantage.
Here is the relevant chapter from an undergrad text book
http://web.usal.es/~emmam/Docencia/Modelizacion/papers/KRUGMAN_WELLS_MACRO_CHAPTER18.pdf
the example uses Columbia rather than Kenya as the rose producer.
look at production under autarky, figure 18-2. In the US if they want an additional box of roses then have to give up two computers. The price of roses in terms of computers is 2.
Now look at page 411 which describes prices when the two countries are trading. The price of roses in terms of computers is 1. Roses are cheaper bought from Columbia.
QED.
Dinero
all examples of comparative advantage should include two things, the production possibilities in each country, and then the price at which the two countries trade the goods. It’s this second bit people tend to forget.
you could also work out what domestic prices would be under autarky, but you’d just assume they mirror production possibilities – actually I did that above, under autarky in US real price of roses would 2 because opportunity cost in production terms is 2.
Thanks for posting the link
But in that text book the US is better than Columbia at computers and Columbia is better than the US at flowers
So stickly speaking that is normal trade not comparative advantage
The books has
US computers 1000 Roses 500
Columbia computers 500 Roses 1000
A better set of figures to illustrteing comparative advantage would be US computers 2000 Roses 1000
@Luis: “…and then the price at which the two countries trade the goods. It’s this second bit people tend to forget. ”
As your textbook example forgets as well. Rather, it leaves the price question as a total afterthought and doesn’t deal with it adequately, only considering the “relative” (essentially opportunity cost of making one thing rather than the other) – and how to max out consumption of both goods from the resources available.
That is fine, except we are really in something approaching a post-scarcity world. If demand for roses rises then Colombia will tap its vast pool of unemployed and tear up a bit more rainforest. No one has to forego any production of computers to increase rose consumption. Not these days.
I would like to recommend the following: re-read what David Ricardo actually wrote in the Principles about the comparative-advantage proposition. Once you truly understand his original numerical example, much of the confusion associated with it will fade away. Perhaps the following paper might also be helpful:
https://www.academia.edu/1948311/Comparative_advantage_and_the_labor_theory_of_value
Dinero,
yes I think you’re right, although the example would go through in exactly the same way if you scaled any of the numbers to make the contrast between comparative and absolute more stark.
James,
right, so you are completely avoiding conceding the point about prices. The text book doesn’t say much more about price determination because actually there are a range of possible prices at which trade could take place to mutual gain, although note they would all involve roses being cheaper when bought from Columbia otherwise the bloody USA wouldn’t buy them from there.
Luis, yes, spot on. Colombian roses are cheaper. Because the inputs are cheaper.
The CA scenario requires that the Colombian roses be more expensive than American roses (this is explicitly the scenario of CA – that one place has an absolute disadvantage in production of both goods), but still cheaper than the loss that would be incurred if a fully-employed US economy increased rose production (and in so doing incurred lost production elsewhere of greater value than the extra cost of the Colombian roses).
James V
how can you write that, after I have just bloody shown you a text book CA example when Columbian roses are cheaper, without any mention of input prices? It was all done on the basis of within-country ratios of production possibilities.
You may want to look at the box headed “pitfalls” on page 411 which talks about input prices.
One place having an absolute disadvantage in production of both goods does NOT mean prices of those goods will be expensive than in the economy with an absolute advantage. In simple CA example there are terms of trade, in the above example the real price of roses fell from 2 to 1 after trade, in real world there are exchange rates. Look at reality you buffoon, the USA has an absolute advantage almost everything versus Kenya, are things cheaper in the USA at prevailing exchange rates? No they are bloody not.
you are not entitled to your own definition of CA.
why can’t anybody on the internet ever admit they are wrong? this is not up for debate James, this is what the sodding CA model says
Yes the Comparative Advantage scenario requires that the Colombian roses be more expensive than American roses numerated in manpower employed, and so for the trade to take place and exploit Comparative advantage the hourly pay rates must be different to make the cash price lower than the domestic price.
Dinero
come on, what the hell is ” numerated in manpower employed”? CA might say Columbian roses require more man hours to produce, but again PRODUCTIVITY and PRICES are conceptually distinct. Again, think about TERMS OF TRADE. Wages are only cheaper in China than the USA because the exchange rate is what it is, and the exchange rate is what it is because the USA has an absolute advantage in most respects, meaning that things made in China are CHEAPER than in the US despite the US having an absolute advantage.
Sorry Dinero, for some reason I read numerated as renumerated. You are simply saying Columbia is at an absolute disadvantage, meaning rose production requires more labour input. Yep. Lower productivity.
right thanks
what if the trade is in the same currency then we have hourly pay rates differential , do you concur
Luis, calling someone a buffoon is a very convincing way of demonstrating the conclusive and unassailable power of your argument. I am blown away by the quality of such an argument.
James
fuck my manners, fuck my arguments: READ A TEXTBOOK AND CONCEDE WHEN YOU MAKE AN ERROR
Dinero
so you have in mind two countries that both you dollars, but have different prices denominated in dollars? Yes wages would differ. Say roses cost $1 in Columbia and $2 in USA, labour input 2 in Columbia, 1 in USA, suppose price=wage, then wages per unit produced in Columbia $0.5 and US $2
But wages differ anyway, as we all know expressed in dollars at prevailing exchange rates, wages are lower China than the US (prices are lower, things are cheaper), again despite the US having an absolute advantage in most goods.
Yep
The point is comparative advantage can’t work on its own to produce beneficial trade, based on just the logic of oppurtunity costs, as wholsalers won’t buy the inefficiently produced goods unless hourly pay rates or exchange rates first adjust the price.
Dinero
“comparative advantage can’t work on its own to produce beneficial trade, based on just the logic of opportunity cost”
yes, see my earlier comment, CA has two components, the opportunity costs in each countries and then the terms of trade, or prices.
also: I love Tim Worstall readers complaining about rudeness.
James, if I may, you need to consider what you mean by “more expensive”. The idea of CA is that wages or exchange rates will adjust until, in Ricardo’s (poor) example, English cloth is cheaper in money terms than Portuguese cloth, even though Portuguese cloth is hypothetically cheaper terms of hours of labour input.
CA is right in theory, my objection is that it seldom applies in practice in anything like the textbook way. Ricardo’s example seems to be no more than hypothetical, and in view of Colombia’s more favourable climate I’d like to see some evidence that flowers are genuinely grown more productively in the USA than in Colombia, once one takes into account higher energy inputs in the USA. Is there any? I take Ian B’s point that in many cases where CA applies any AA would be unobservable, but that doesn’t apply to flowers – US growers were protected until quite recently by tariff barriers and freight costs.
I do think CA applies to manufacturing, but only where the productivity disadvantage is small and temporary. Rather than resulting in the trade of widgits for gadgets, it leads to a concentration of the manufacture of both widgits and gadgets in countries with cheap, productive labour and adequate infrastructure.
“I’d like to see some evidence that flowers are genuinely grown more productively in the USA than in Colombia”
Paul B yes that is the crux, although most estimates of total factor productivity in most industries will be higher in the US than in poor countries. I wouldn’t mind betting that Dutch flower production is more efficient than Columbian, for instance, So all you have to do is find examples of the US importing something from a country at an absolute productivity disadvantage and Bob’s your uncle. This should not be hard to find, so I am not sure why you doubt the idea’s application in practice.
I think one thing being overlooked here is the commodification assumption. Everyone’s talking about flowers as if they’re a homogenised commodity product. Are Colombian roses identical to Californian roses in every way? Are the roses from one particular farmer identical to those from another? If not, is it safe to talk about them all being in the same “sector”?
I have reliable, if anecdotal evidence from a female of my acquaintance that one bunch of roses is very much not the same as another bunch of roses, the differential being apparently directly proportional to the amount of gratitude the male rose purchaser is entitled to receive.
Comparative Advantage sets out to illustrate why someone would trade with someone who is less productive than themselves.
This is evident everywhere In the modern economy with the specialization of labour into differently paid jobs ., and so examples are easy to find.
Such as a man paying someone £14 an hour to paint their fence so that they are available to earn £50 an hour writing computer code.
If they did not earn more than the painter they might as well paint it themselves.
No -one on the thread has come up with worked example with prices for the finished goods
the americans domestic economy values 1 computer as half a box of roses.
and the columbians value 1 computer as two boxes of roses
but they are both wiling to exchange roses for computers at parity when it comes to international trade. So how does that come about.
or here
http://www.truefreetrade.org/comp.htm
how is the final trade arived at 750 widgets traded with 2250 gadgets. where does that ratio come from.
Oh I get it – when they exchange at parity they both benfit for that reason, because they value them differently.
@PaulB,
CA is obviously right in theory but its proponents are clearly struggling to find real-world examples as opposed to expletive-laden tantrums. I think that’s because many of the assumptions on which CA relies no longer apply. In particular, mercantilism is dead and we simply don’t look at the “national” interest in trade any more, but rather that of individuals.
if anybody is “struggling” to do anything, it is to admit a mistake
JamesV-
As I said above, it is impossible to provide real world examples, because you need to measure a counterfactual. Since economics can’t do control experiments with control groups, the request is impossible to satisfy. Economics is descriptive of principles, not predictive.
It is in a way equivalent of demanding that a proponent of evolution prove that some creature is “most fit” compared to some other form it could have evolved into. You can’t do it; the other forms don’t exist in the real world. That does not negate the scientific principle that species evolve to be “more fit”.
As Paul B said, that one sentence in my post didn’t improve it in any way. But it has sparked one of the most brilliant discussion threads I have ever read. So it was well worth it.
As I’ve explained already in an earlier comment, this is a macroeconomic post. I apologise for confusing people with my reference to comparative advantage – it really wasn’t the point of the post. However, it is evident that some people didn’t get the point of the post even when they read beyond that line. So I’ve explained it all again here.
http://coppolacomment.blogspot.co.uk/2013/11/trade-confusion.html
And for those who STILL don’t get it, here is a two sentence summary: Trade surpluses DO NOT INCREASE TRADE. They may even reduce it.
Diogenes, the main job of governments is to dismantle barriers to trade, ensure they remain dismantled, and then get out of the way. Sadly that is not what governments do.
Raoul, Cheddar cheese is a generic cheese variety which is produced all over the world and in which Britain has no advantage. That’s why I suggested it might be a better example than wine, where the unique selling properties are often determined by where it is produced.
Dave, I am not going to lose any sleep over your opinion of my writing. My blog site has about 50,000 visitors a month. Evidently others like it, even if you don’t.
Luis Enrique: One of the reasons I doubt that CA without AA occurs often is the textbook examples. Ricardo seemed not to be able to think of a real-world example, and the chapter you linked to starts off saying
It goes on to talk about comparative advantage, but this is evidently an example of absolute advantage also.
(To be fair, there’s a sidebar about shirt manufacture in Bangladesh which offers a better example.)
Ian B: I’m laughing at your claim that the Austrian School is “the most scientific” because it “sticks to working with principles” and refuses to look at data. When Galileo looked at the data, he found that a ball dropped from the mast of a moving ship falls to the base of the mast, not behind it. When he declined to look at the data and relied on his principles, he rejected Kepler’s discovery that the planets follow elliptical orbits around the sun. Which of those views was scientific?
No Paul, you’ve got it the wrong way around. It’s because the Austrian School is more scientific that it recognises the limits and pitfalls of attempts at econometrics.
It’s more scientific to ignore the data? Especially the data that don’t support the theories?
I guess if it walks like global warming and quacks like global warming…
It’s nore scientific to know the limits of what you can get from the data.
So CA is a faith position. Used to separate the true believers from the ignorant, with those of my position (sure it works in theory under certain circumstances but it’s bloody hard to see it working in the real world) assigned to the goats.
No, it’s a deduction from other known facts. Faith is when you believe something without any justifiable reason to do so.
“Raoul, Cheddar cheese is a generic cheese variety which is produced all over the world and in which Britain has no advantage. That’s why I suggested it might be a better example than wine, where the unique selling properties are often determined by where it is produced.”
I was perhaps being a bit tongue-in-cheek. West Country Farmhouse Cheddar can only be produced in certain places (and the packaging of more expensive Cheddars tends to display their origin quite prominently), but you are right that Cheddar in general is generic. All the nicest Cheddars that I have encountered have been English. And from what I’ve seen of American “Cheddar” it can be bright yellow or even in a tube. This would seem to suggest that England has some advantage at producing good Cheddar. But the simple non-economic explanation for this apparent superiority is that I’ve tried many more English Cheddars and only buy the good ones, so I’m comparing some of the best English cheeses to the most generic American cheeses.
Of course that doesn’t rule out the possibility of absolute or comparative advantage. Perhaps the English climate is better for cows. Or perhaps the Americans are better than the British at both agriculture and finance, but due to lack of land Britain has a comparative advantage at finance as farming is relatively land-intensive. But that was your point:. If we accept that standard Cheddar is the same wherever it is produced then certain countries importing it could be an example of comparative advantage (though specialisation could potentially have benefits even when the countries specialise in the wrong things, so it wouldn’t necessarily be an example), unlike wine, which is actually a different product when produced in different places (though I’m not entirely convinced on this — if there have been some blind taste tests then I’d be interested to see the results).
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