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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.

Suggested Citation

  • Alan V Deardorff, 2004. "Ricardian Comparative Advantage with Intermediate Inputs," Working Papers 501, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:501
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    File URL: http://fordschool.umich.edu/rsie/workingpapers/Papers501-525/r501.pdf
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    References listed on IDEAS

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    1. 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.
    2. Ronald W. Jones, 2000. "Globalization and the Theory of Input Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 026210086x, January.
    3. 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 221-221.
    4. Avinash K. Dixit & Gene M. Grossman, 1982. "Trade and Protection with Multistage Production," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 583-594.
    5. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
    6. Gene M. Grossman & Elhanan Helpman, 2002. "Integration versus Outsourcing in Industry Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 85-120.
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    Citations

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    Cited by:

    1. 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.
    2. Nowak, Jean-Jacques & Petit, Sylvain & Sahli, Mondher, 2010. "Tourism and Globalization: The International Division of Tourism Production," MPRA Paper 75083, University Library of Munich, Germany.
    3. Rodolfo Helg & Lucia Tajoli, 2002. "Patterns of International Fragmentation of Production and Implications for the Labor Markets," Working Papers 503, Research Seminar in International Economics, University of Michigan.
    4. 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.
    5. 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.
    6. Wixted, Brian, 2006. "Cluster Complexes: A Framework for Understanding the Internationalisation of Innovation Systems," MPRA Paper 846, University Library of Munich, Germany.
    7. Wilhelm Kohler, 2007. "The Bazaar Effect, Unbundling of Comparative Advantage, and Migration," CESifo Working Paper Series 1932, CESifo Group Munich.
    8. Alan V. Deardorff, 2005. "How Robust is Comparative Advantage?," Review of International Economics, Wiley Blackwell, vol. 13(5), pages 1004-1016, November.
    9. Nowak, Jean-Jacques & Petit, Sylvain & Sahli, Mondher, 2013. "Tourism and Globalization: A Trade Theoretic Approach," MPRA Paper 75087, University Library of Munich, Germany.
    10. Beladi, Hamid & Marjit, Sugata & Broll, Udo, 2011. "Capital mobility, skill formation and polarization," Economic Modelling, Elsevier, vol. 28(4), pages 1902-1906, July.

    More about this item

    Keywords

    Ricardian model; Intermediate inputs; Comparative advantage;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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