This forthcoming Journal of Economic Perspectives article by Jonathan Eaton and Sam Kortum on the Ricardian model of trade is fantastic. It walks the reader from Ricardo (1818) to Mill (1844) to Dornbusch, Fischer, and Samuelson (1977) to Eaton and Kortum (2002) to the modern frontier. Put it on your syllabi.
Archive for the ‘Comparative advantage’ Category
In his Nobel lecture, Paul Krugman suggested the new trade theory’s relevance might be fading in some dimensions, as trade between countries with vastly different incomes and capacities rose rapidly in recent decades:
And nobody doubts that trade between the United States and Mexico, where wages are only 13 percent of the U.S. level, or China, where they are only about 4 percent, reflects comparative advantage rather than arbitrary, scale-based specialization. The old trade theory has regained relevance.
But a couple of recent pieces of evidence supposedly point towards the decline of traditional Ricardian forces for trade. In a recent NBER working paper, Andrei Levchenko and Jing Zhang calibrate a multi-sector Eaton-Kortum model along the lines of Costinot, Donaldson, and Komunjer and claim:
First, we find strong evidence that comparative advantage has become weaker. Controlling for the average productivity growth of all sectors in a country, sectors that were at the greater initial comparative disadvantage grew systematically faster. This effect is present in all time periods, and is similar in magnitude in both developed and developing countries. The speed of convergence in sectoral productivities implied by the estimates is about 25% per decade.
This morning, Dani Rodrik posted a graph that shows convergence in labor productivity in manufacturing industries since the 1980s. I believe Rodrik’s graph comes from directly estimating labor productivity using UNIDO data, rather than a model-derived measure of productivity. (Rodrik blogged the results without mentioning the underlying/forthcoming paper from which they’re excerpted, so not all the details are clear.)
So two different measures of cross-country productivity differences suggest that Ricardian comparative advantage may be declining as a force for international trade volumes. It’ll be interesting to see how, both theoretically and empirically, we can resolve the contrasting claims of Krugman and Levchenko, Zhang, and Rodrik.
Further: A commenter suggests looking to Heckscher-Ohlin-Vanek rather than Ricardo. Indeed, some of Krugman’s Nobel lecture comments are referring to factor-driven comparative advantage rather than Ricardian comparative advantage. That resolution gives one interesting answer to the question I posed in the post’s title.