Comparative Advantage: From an Individual to the Economy
This paper identifies an internal inconsistency in the Heckscher-Ohlin (H-O) models of international exchange. The inconsistency stems from assuming homogeneity of inputs within a population. This assumption annihilates individual comparative advantage, benefits from exchange and, consequently, existence of autarky prices. In order to remove this inconsistency, I build a two-good multi-individual model by using the microeconomic concept of individual comparative advantage stemming from differences in endowments of qualitatively heterogeneous inputs. The model shows how differences in the distribution of individual production possibilities result in individual specialization, exchange and differences in autarky prices between hypothetically isolated economies. Next, the effect of preference heterogeneity, learning by doing and supply restrictions is examined. In addition to bringing internal logical consistency into the theory of cross-border exchange by demonstrating how price differences between hypothetically isolated economies can be derived from the general neoclassical and Austrian subjectivist principles, this paper addresses the criticisms raised by the labour value theorists. The model can be refined to include comparative advantage in the production of capital goods and differences in the distribution of ownership over natural resources and capital goods. This theoretical approach to inter-local exchange has important policy implications. While the H-O framework lends itself well to conflicting interventionist policies of production allocation based on different interpretations of ambiguous aggregate data, the alternative microeconomic approach acknowledges the importance of the institutional setting in which individual comparative advantage, unknown to an external observer, is discovered, enhanced, and expressed.
|Date of creation:||2010|
|Date of revision:|
|Contact details of provider:|| Postal: 555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202|
Phone: (414) 918-3190
Fax: (414) 276-3349
Web page: http://www.aaea.org
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ags:aaea10:61299. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.