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Ricardian Comparative Advantage with Intermediate Inputs

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  • Alan V Deardorff

    (University of Michigan)

Abstract

This paper examines the role of comparative advantage in a Ricardian trade model with intermediate inputs. The first issue is how to define comparative advantage when there are intermediate inputs. Several definitions are suggested, differing in whether they are based on the total costs of producing goods, on the one hand, or on the labor requirements per dollar of value added, on the other; and differing also – since both approaches require prices of intermediate inputs – in the choice of prices for making these comparisons. Standard “predictions” of trade patterns in terms of comparative advantage are easily derived, but using the value-added definition and actual prices that prevail with trade. These have the usual implications for patterns of specialization based on rankings, or “chains,” of comparative advantage. However, because these prices are not given and may depend on barriers to trade, these comparisons are less informative than in Ricardian models with only final goods. In fact, trade patterns here can be so sensitive to trade costs that any such comparison predicting the trade in particular goods fails to be robust. In spite of this, the gains from trade are unambiguous in these Ricardian models, with imported inputs actually providing an additional source of gain from trade. Also, a weaker statement of the Law of Comparative Advantage, using only a correlation or average relationship between relative autarky prices and trade, is also valid under weaker assumptions than in more general models.

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File URL: http://fordschool.umich.edu/rsie/workingpapers/Papers501-525/r501.pdf
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Bibliographic Info

Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 501.

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Length: 35 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:mie:wpaper:501

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Postal: ANN ARBOR MICHIGAN 48109
Web page: http://www.fordschool.umich.edu/rsie/
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Keywords: Ricardian model; Intermediate inputs; Comparative advantage;

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References

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  1. W. M. Corden, 1966. "The Structure of a Tariff System and the Effective Protective Rate," Journal of Political Economy, University of Chicago Press, vol. 74, pages 221.
  2. Ronald W. Jones, 2000. "Globalization and the Theory of Input Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 026210086x, December.
  3. David Hummels & Jun Ishii & Kei-Mu Yi, 1999. "The nature and growth of vertical specialization in world trade," Staff Reports 72, Federal Reserve Bank of New York.
  4. Dixit, Avinash K & Grossman, Gene M, 1982. "Trade and Protection with Multistage Production," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 583-94, October.
  5. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
  6. Jones, Ronald W. & Peter Neary, J., 1984. "The positive theory of international trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 1, pages 1-62 Elsevier.
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Citations

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Cited by:
  1. Alan V. Deardorff, 2005. "How Robust is Comparative Advantage?," Working Papers 537, Research Seminar in International Economics, University of Michigan.
  2. Wilhelm Kohler, 2007. "The Bazaar Effect, Unbundling of Comparative Advantage, and Migration," CESifo Working Paper Series 1932, CESifo Group Munich.
  3. Rodolfo Helg & Lucia Tajoli, 2004. "Patterns of International Fragmentation of Production and Implications for the Labor Markets," International Trade 0405002, EconWPA.
  4. Takeshi Ogawa, 2013. "Application of Jones' Inequality to the n-country, m-good Ricardo–Graham Model," Economics Bulletin, AccessEcon, vol. 33(1), pages 379-387.
  5. Markusen, James R., 2005. "Modeling the Offshoring of White-Collar Services: From Comparative Advantage to the New Theories of Trade and FDI," CEPR Discussion Papers 5408, C.E.P.R. Discussion Papers.
  6. Oladi, Reza & Beladi, Hamid, 2010. "On technical progress and the boundary of non-traded goods," Mathematical Social Sciences, Elsevier, vol. 60(3), pages 204-209, November.
  7. Beladi, Hamid & Marjit, Sugata & Broll, Udo, 2011. "Capital mobility, skill formation and polarization," Economic Modelling, Elsevier, vol. 28(4), pages 1902-1906, July.
  8. Wixted, Brian, 2006. "Cluster Complexes: A Framework for Understanding the Internationalisation of Innovation Systems," MPRA Paper 846, University Library of Munich, Germany.

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