Comparative Costs, the Invisible Hand, and Factor Endowments: Ricardo, Ohlin, and Samuelson
The Ricardian principle of ‘comparative advantage’ refers to relative costs (relative autarky prices) compared to another country. The relative cost (price) functions can be obtained directly from specified cost functions with global regularity properties. We derive the CES relative cost function with two primary factor prices. The Stolper-Samuelson Theorem is embedded in relative cost functions and their numerical inelasticity property. Factor price equalization represents extreme parametric versions of the relative cost functions. Moreover a relative cost function connects isoquant tangents of contract curves with the tangents (shape) of production possibility curves. The CES relative cost function is combined with Ohlin‘s ‘mutual-interdependence theory of pricing’ in solving the Walrasian general equilibrium system.
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