Hi, in earlier lectures on
comparative advantage we assumed
that different countries had different productivities
in different industries. Today what we
want to do is just briefly fill that in a little bit
and explain why productivities might differ
in different industries in different countries.
Let's go.
The most obvious differences are those
associated with climate or geography or
natural resources and indeed this
is how Ricardo first phrased the comparative
advantage model. In terms of wine and cloth.
With Portugal being better at producing wine
and England having a comparative advantage in
producing cloth. So when we're
thinking about agriculture or mining or tourism
then these differences in climate can create
difference in comparative advantage.
Bear in mind however, don't forget
it is comparative advantage.
So Florida may have an absolute advantage
both in producing oranges and in producing
tourism. But it's comparative advantage may
be in producing let's say tourism.
So even if Florida is the best place in
the world for growing oranges
we might see more tourism there and more
oranges grown elsewhere if Florida
has a comparative advantage in tourism.
Ok, what else?
Another advantage created by the fact
that labor is not internationally mobile
is that different countries have different
proportions of capital to labor
or low skill to high skill labor.
Different proportions of their factors
of production. So some countries for example
have a lot of low skilled labor
but they have a comparative advantage
in producing goods which require a lot of
low skill. Other countries have
more high skill labor they have the
comparative advantage in producing
aircraft for example which requires a
lot of high skill.
This by the way is the Hecksher-Ohlin model
and a lot has been written about this model.
Increasing returns to scale on the division
of labor is another source of comparative
advantage. And this one is interesting
because it's a source of comparative
advantage which may be created by
trade rather than existing naturally
before trade. And the focus on models
with increasing returns to scale came about
when people realized that countries
which are ex-ante quite similar
they trade quite a bit.
So the biggest trading partner
for the United States is Canada
which looks a lot like the United States.
Don't tell the Canadians that, but
it's true.
Developed countries in general trade to
trade most with other developed countries.
Theory of comparative advantage says
oh, that's a little bit odd
because you want to trade with countries
that are different than you
not with countries that are the same as you.
So how does increasing returns
explain that the fact that countries
which are quite similar trade a lot?
Well by specializing, countries can
increase the productivity. They
become ex-post different. After they specialize
they become different, and then they can
trade based upon those increases
in productivity.
For example, in the world we don't need
every single country to have it's own
automobile plant. To have it's own
set of automobile producers.
It's better to specialize in one or
two or half a dozen countries
producing automobiles because
you get economies of scale.
It becomes cheaper to produce automobiles
per unit the more automobiles are produced.
So by specializing one country produces
automobiles another country produces
aircraft another country produces
computerized chips; by specializing,
countries can take advantage of
economies of scale, they then become
more producitve in one good or set
of goods and then they trade for the
other goods that they want.
So it's still comparative advantage
but it's comparative advantage created
afterwards in order to take advantage
of increasing returns.
In these models what you can show
is that you get lower costs and
greater variety.
Paul Krugman won a nobel prize
in part for his work on these models.
Later I'll point you towards his
nobel prize lecture.
What else?
When we think about increasing
returns to scale we typically think about
a big dam or we think about
a huge auto plant which is able to
take advantage of robots the bigger
it gets. Or giant agricultural farms and so forth.
But it's important to realize that increasing
returns to scale could also refer to
the division of knowledge.
That is as people specialize
they become more knowledgeable
about an area and that is what increases
their productivity. So think about
physiciains. We don't simply have generic
physicians. We have heart surgeons, brain
surgeons, podiatrist specialists in the feet,
specialists in the ear nose and throat,
we have cancer specialists,
diabetes specialists.
So by dividing knowledge among many
different brains we get a vast increase in
productivity. So the examples I've given
are more about interpersonal division of
knowledge, increasing returns to scale
and trade. But this also happens
across countries as well.
Different countries or different regions
within a country specialize in different
areas. Hollywood for example,
Silicon Valley, Dalton Georgia is the world's
leading producer of carpets because you
have a lot of specialized knowlege
in that region. That's what makes them
productive. The specialization of knowledge.
Not so much that they have giant factories but
they have smart people. People
who know a lot.
Institutions can also generate
comparative advantage.
So for example, some countries
have more labor market flexibility
than do other countries.
Countries with a lot of flexibility
so where they can take workers from
one area of the economy and move them
quickly into another area of the economy
they tend to specialize more in high value
products but for which there is a lot of
variability. A lot of variability in demand
for example.
Another example is finance.
Some countries have better banking
structures. If you're going to need a
lot of finance you're going to want to
be in a country like the United States
where you can easily raise a lot of capital.
It gives a big comparative advantage to
the United States in production which
requires huge amounts of capital.
Contract enforcement.
In some countries it's very difficult
to enforce contracts so they are
going to specialize in production
which doesn't require a big
division of labor or a big
division of knowledge.
Which can be done all within one
family or within one firm.
A smaller firm or where you require
less contracts. If you require
a greater division of labor over
more firms or more parts of the
country over more people you're
going to want to be in a country that
has better contract enforcement.
So for all of these reasons, these
are all sources of comparative advantage.
Here are some further resources on
Ricardo's theory of comparative advantage
on factor proportions.
Here's Paul Krugman's nobel prize lecture
which is quite accessible and
I recommend it. You'll also
see it in our list of lectures.
Okay, thanks very much.