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2021 | OriginalPaper | Buchkapitel

Dark Spots in Trade Theory: Early Testing Attempts

verfasst von : Sorin Burnete

Erschienen in: Organizations and Performance in a Complex World

Verlag: Springer International Publishing

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Abstract

The beginnings of the economic theory correspond to philosophers’ attempts to explain why and how do countries trade with each other. Yet even more puzzling was the question how should countries trade? It is no surprise that despite the formidable developments of the theory in the last 200 years plus, there still are dark spots in the economics of trade. Globalization has rendered the issue even murkier. Beside the fact that international trade cannot be insulated from other economic domains, which makes it inadequate for experiments, but even testing itself is cumbersome. Only, evidence on such a complex field as international trade is by no means easy to come by.

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“Not so Absolutely Fabulous”, The Economist, Nov. 4th, 1995; “Free exchange, Revisiting Ricardo”, Aug. 23rd, 2014

MacDougall carried out his test on the economies of the United States and Britain, based on the average productivity in 1937. Wages were two times higher in the US at the time, which, according to the comparative cost’s theory, indicated a double level of productivity for the Americans. Hence, the author considered the United States to have comparative advantage in those industries where the ration was greater than two and Britain to have comparative advantage in industries where the ratio was below two (MacDougall 1951).

To add to the survey’s rigor, the author uses the net cost, equivalent to added value plus amortization, per product unit. The conclusions relieve a somewhat surprising fact, that is: exports are tightly correlated with productivity magnitude but poorly correlated with wage rates (correlation coefficient 0.24). The correlation between exports and unit cost per product (which includes the cost of capital) turned out to be strong enough (Balassa 1989).

“Productivity advantages are not counterbalanced by higher wages paid in industries with higher productivity, and productivity differences continue to account, in a large measure, for differences in export shares…This implies that the relationship between wages and export shares is by no means uni-directional; while lower wages could conceivably lead to higher export shares, higher export shares may also make possible paying higher wages.” (Balassa 1989)

“The last question we address in this section concerns the implications of sticky money wages. For a given world money supply, downward stickiness of money wages implies the possibility of unemployment. We assume upward flexibility in wages, once full employment is attained. (…) Thus, an increase in the foreign wage rate, by moving the terms of trade against us, shifts comparative advantage and employment toward the home country” (Dornbusch et al. 1977).

Changes in the structure of comparative advantage were highlighted with the aid of the standard deviation (s.d.) of RCA indices. Small values of the s.d. indicates increased diversification of exports, whereas relatively great values show a more pronounced trend toward deeper specialization (Balassa 1977).

American economist Wassily Leontief empirically tested Heckscher-Ohlin’s factor-proportion theorem in the 1950s, using data from the US economy. Leontief hypothesized that in US’s commercial relations with other countries exports of capital-intensive goods were preponderant, while US’ imports consisted mostly labor-intensive ones. The author made use of the input-output analysis and found that US’s imports were 30% more intensive in the capital factor in comparison with exports. This peculiar result was dubbed Leontief’s paradox (Leontief 1956).

Considering the elasticity of factor substitution within an industry as constant, the Cobb-Douglas function can take the general form: F (K, L) = γ [ − + (1 − ) ⁻]^−1/, where K, L stand for the value of capital respectively labor, γ is an efficiency parameter, is an income distribution parameter, and a parameter of factor distribution elasticity. (Arrow et al. 1961)

The authors attempted to demonstrate the invalidity of this identical technologies hypothesis by discussing the role of infrastructure in the growth of efficiency and competitiveness of both industries and sectors, and whole national economies. The named study set out from an empirical observation regarding the scarcity of foreign investment in developing economies, namely that the precarity of infrastructure in these countries diminishes the return of the invested capital. It is one of the main reasons for which western companies are often reluctant to invest in these countries, despite the latter having a lower capital-labor ratio than developed countries. (Yeaple and Golub 2007) As a matter of fact, the observation belongs to another American economist, R. Lucas, who employs the paradox term to emphasize this difference. (Lucas 1990)

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Balassa, B. (1977). “Revealed” comparative advantage revisited: An analysis of relative export shares of the industrial countries, 1953-1971. Manchester School, 45(4), 324–344.CrossRef

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Titel: Dark Spots in Trade Theory: Early Testing Attempts
verfasst von: Sorin Burnete
Verlag: Springer International Publishing
Buch: Organizations and Performance in a Complex World
Print ISBN: 978-3-030-50675-9

Electronic ISBN: 978-3-030-50676-6

Copyright-Jahr: 2021
DOI: https://doi.org/10.1007/978-3-030-50676-6_3

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