The Hindu Business Line : What comparative advantage?

IN A recent paper in Journal of Economic Perspectives, Prof Paul Samuelson has suggested that the US may be actually losing because of globalisation. This conclusion goes against one of the greatest theories in economic literature — Ricardo's theory of comparative advantage. What is this theory?

Suppose you typically take typically 3 days to design software. You also do carpentry as a hobby; it takes 10 days for you to make a decent teakwood showcase. Your friend also possesses similar skills. He can design software in six days and takes about 8 days to give some shape to the wood.

Notice that you are more skilled than your friend in both jobs. Yet, your friend is less efficient in carpentry than he is at designing software.

Now, assume that both of you decide to exchange goods. It is in your interest to design software. Why? You can make at least three software products instead of making one teakwood showcase.

Your friend is better off at carpentry. Why? It takes him twice the time you take to design the software. He will rather do the carpentry work and exchange that for the software. This is the principle of comparative advantage. It is essentially based on the principle of opportunity cost.

Extend this logic to one country dealing with another and you have the concept of globalisation. So powerful is the concept of comparative advantage that many economists have contributed related theories to the literature.

One such theory is the Hecksher-Ohlin model. This model states that a country will enjoy comparative advantage in a good when it has relatively more resources that can be used as inputs for creating that good.

Now, years after David Ricardo's theory and other allied principles, economists such as Paul Samuelson are calling to question the benefits of globalisation.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Question 'N' Auto

Readymade garments — Making the right designs

FDI: Benefits will flow only with open, consistent policy

Profit-booking will enhance returns

Equity fund performance: Absolute returns may be misleading

Templeton India Growth Fund: Invest

UTI Petro Fund: Hold

Kotak Mutual

Reliance launches two schemes for NRI

Looming risk of rising crude prices

Indian Petrochemicals Corporation: Hold