The Theory of Comparative Advantage

[Outofin]

How do you guys think of this? the theory of comparative advantage is a lie

If you're not able to read Chinese, the 4 tables could give you a brief idea. Table 1 and 2 are before and after free trade according to the theory of comparative advantage. Table 3 and 4 are revised from table 1 and 2, adding some critical parameters, yielding totally different result.

I think this, after all, is essentially a question about demand-supply, which is a key factor. The theory of comparative assumes a infinite demand, but I assumed a balanced demand. Maybe it should be somewhere in between, but definitely not infinite.

[Manchu]

This is quite an insidious post you've got there. But it misconstrues a lot about "comparative advantage".

First, demand does just not disappear once you reach a certain point. People are less willing to pay, is all. For example, just because you have one pair of shoes doesn't mean you'd never buy another pair. The price would just have to be low enough, is all. So in this respect, demand truly is infinite. (It just will affect wages, is all).

Second, the work wouldn't necessarily be separated with Americans making only shirts, and Canadians making only shoes. This would be a very unlikely case, in fact. All solutions would result in the two countries specializing to a greater degree, but it doesn't mean they'd only make "their" product (or sit around unemloyed otherwise).

Third, the countries actually trade, not just combine resources. Part of the joy of comparitive advantage is that they both benefit. (E.g., they trade 10,000 shirts for 5,500 shoes, and both have more than they would individually).

The commenter "Mike" brings up a couple good points (including the hard "Demand" limit). I guess me writing here is kind of superfluous.

[Outofin]

Demand is not infinite. Something that will happen in infinite time will never happen. But obviously, demand doesn’t need to be infinite to make the system work. It only needs to be large enough and grows fast enough. Can you prove that?

At a time, demand is a conditional number. It could grow over years, but doesn’t happen over night. Does it mean that sudden free trade will lead some businesses’ immediate death? Demand increase could happen over night if you drop your price. But there’s a bottom line. Selling under your bottom line will hurt you. When it reaches a certain point, it will make you fail.

Suppose the US uplifts tax on textile products imported from China and China does the same favor for some US industries. You can say that American businesses could lower their price. I don’t doubt some will. I also don’t doubt that some, probably most, will fail. People won’t sit around unemployed. They could find other jobs like in Target and Wal-mart, perhaps with lower wages. But labor has a bottom line too. Some will fail and go bankruptcy.

Put simply, some will fail, and it happens more likely in those with no advantage than those with advantage. In good years, those with no advantage seem to work well. But in bad years, “comparative advantage” doesn’t help.

I’m afraid it’s not the case that demand will be large enough and grows fast enough. It will be the opposite. The supply will be large enough and grows fast enough to meet any demand. How many movies would you like to see and tell Hollywood. How many shirts do you want to have and see if Chinese could make them.

[studentyoung]

经济家也用同样的原则来分析劳工的供给与需求。他们认为失业的来源也是雇主和雇员交易效率太低。因为各种障碍（譬如政府的干扰、户口的限制），两方没能互相找到，或谈判到合适的价钱。

Well, the true condition in China is that huge of farmer works, with low skill and low education, are unemployed. I don't think the main reason is the low efficiency of deal between employers and employees, or the barrels like the governmental intervention. I think the reasons are 1.too much of them and the jobs are relatively limited, especially for a long period, 2 most of them can hard satisfy the current world, which now is facing up to a technology revolution, with their skills and knowledge. So we can say, the human resourcs can't satisfy the need of the market, which causes the umployment.

What’s more, the reason why countries need international trade is they all need to use it optimize their industrial structure and lift up their comprehensive national power, but the precondition is the international trade or free trade won’t crack down their own national economy or leave too many social problems. And in this aspect, the comparative advantage should not be taken as just one rule in internationl trade.

Thanks!

[Outofin]

How hilarious!! Today when I checked my blog's visit history, I found that some guy came from google by searching for 相对优势+定义 (comparative advantage + definition). Then I tried, my post "The theory of comparative advantage is a lie" comes to the very first result from Google. I laughted out. This is so ridiculous.

BTW, if anyone is still interested in this discussion, I wrote a new post several days ago to further my argument.

被说成相对优势的绝对优势

add

======

I think what's happening in Google is, when you search for "something+definition", it will actually search the phrase "something is" first. The keyword "is" is replacing "definition". Then everybody got the definition: it is a lie.

[Green Pea]

Demand is infinite. It's called greed.

Suppose the US uplifts tax on textile products imported from China and China does the same favor for some US industries. You can say that American businesses could lower their price.

Outofin, can you explain this more? How could companies lower prices? They could also raise prices and take the "tax" as bottom line profit too, can't they? Perhaps I am not clear what you mean by "uplifts". Do you mean increase taxes or decrease taxes?

[Outofin]

My bad, I meant "decrease".