Ricardo Through the Looking Glass: (Mis)adventures of Comparative Advantage in Developing Economies

Suppose two countries, A and B, manufacture aircraft components – engines and tires. Suppose country A has a comparative advantage in engine manufacturing, perhaps for a simple reason of being situated closer to a source of titanium which is used in fan blade manufacturing. And suppose that country B has comparative advantage in tires, perhaps because of being geographically closer to an oil resource. According to the Ricardian theory, country A should specialize in engines and country B should focus solely on tires. But suppose that a set of engines costs ten million dollars, while a set of tires, including all replacement tires needed over the service life on an aircraft, costs less than one hundred thousand. Will country B benefit from this Ricardian specialization? We aim to provide the simplest possible two-country two-commodity model with the smallest possible set of assumptions, that shows that the specialization does not always benefit all trade participants. Instead, one of the participants may get a disproportionate benefit from trade at the expense of the other.