[PDF] DEMAND PATTERN HYPOTHESIS: LINDER

[PDF] DEMAND PATTERN HYPOTHESIS: LINDER - CORE

Factor Price Equalization Theorem; The movement of "goods to some 21 extent compensates for the lack of interregional mobility of the factors,"

[PDF] A critique of modern theories of trade

11 jan 2021 · This theorem assumes free mobility of factors of production among countries, and as a result, factor prices would be the same in all countries

[PDF] List of Contributors, Indexes - National Bureau of Economic Research

Khan, Mohsin, 160n7 Kim, Yoonbai, 112 King, R G , 415,418 Factor-price-equalization (FPE) theorem, National Academy of Sciences, Committee

[PDF] Explaining the success of the Indian IT industry

Factors important for the development of an IT industry in India are The factor prize equalization theorem states that when prices of outputs are

101350_6144507853.pdf

DEMAND PATTERN HYPOTHESIS: LINDER

EXPLANATIO

N O F INTERNATIONA L TRAD E THESI S

SUBMITTE

D FO R TH E DEGRE E O F DOCTO R O F PHILOSOPH Y I N

ECONOMIC

Uritfe

r th e Supervisio n o f Prof . Mrs . Kishvi/a r Shabbi r Kha n HEAD .

Departmen

t o f Economic s B y BANKE Y L SHARM A

ALIGAR

H MUSLI M UNIVERSIT Y

ALIGAR

H (INDIA ) 197
6

T1775

ABSTRACT

.<>. ' Th e majo r branche s o f internationa l economic s includ e internationa l monetar y economic s an d th e theor y o f internationa l trad e generall y describe d a s th e pur e theor y o f trade . Th e forme r deal s wit h th e proces s o f adjustmen t i n th e balanc e o f paymen t whil e th e latte r handle s th e "condition s o f eq.uilibriu m i n th e 'real ' magnitude. " Th e pur e theor y o f trad e concentrate s o n th e volume , terms , directio n an d th e structur e o f trade . It s positiv e an d normativ e concerns , obser\re d Schumpeter , wer e th e "mios t importan t exploits " tha t gav e birt h t o classica l welfar e economics . I t seem s t o posses s inherite d complacenc y o f turnin g inwair d fo r refinement s rathe r tha n outwar d t o th e development s i n compatibl e fields . Despit e refinement s an d a variet y o f newe r trad e versions , th e comparativ e advantag e stil l serve s a s a n undercurrent . Th e presen t stud y wa s designe d t o analys e th e importan t theorie s o f trad e an d examin e som e interestin g post-Leontlef-exercis e trad e versions . Th e Ricardia n comparativ e (cost ) advantag e an d th e Heckscher -

Ohlinia

n facto r proportio n version s o f trad e togethe r wit h th e "availa bility " theor y an d th e "produc t lif e cycle " accoun t o f trad e receive d attention . However , th e unorthodo x preferenc e similarit y propositio n o f trad e b y Staffa n Burensta m Linde r becam e th e stud y focus .

Flavore

d wit h th e ingredient s o f monopolisti c competition , th e percapit a incom e base d preferenc e similarit y propositio n advocate s trad e intensit y betwee n tradin g partner s exhibitin g simila r deman d structures . Th e preferenc e similarity , therefore , subject s i:-il f t o 1^ dua l interpretatio n representin g (i ) th e deman d structur e similarit y amon g th e tradin g nations , an d (ii ) th e increase d trad e flo w result in g fro m th e percapit a Incom e base d preferenc e similarity . Th e latte r versio n implie s tha t th e distanc e i n term s o f percapit a incom e o f th e tradin g partner s function s a s a resistanc e variable . T o tes t it s statistica l validity , Hypothesi s K , tha t "th e percapit a incom e differen tial s an d trad e intensit y bea r invers e relationship " wa s formulated .

Hufbaue

r statisticall y investigate d th e firs t versio n b y usin g th e followin g econometri c model : T I S X . M . n m jn n i n n j n wher e T I = th e trad e intensit y inde x reflectin g trad e structur e X . = export s o f commodit y "n " a s a percentag e m of country i's total exports, and M . = import s o f commodit y "n " a s a percen t * ^ o f countr y j' s tota l imports . Th e statistica l evidenc e generate d i n thi s stud y fail s t o suppor t th e percapit a incom e base d deman d structur e similarit y aspec t o f th e Linde r hypothesis . O n th e basi s o f insigh t gaine d fro m analytica l examinatio n o f variou s versions , th e followin g additiona l hypothese s wer e advanced : H _ Th e transportatio n cos t serve s a s a marke t barrie r t o th e trad e flow . "^ H ^ Th e marke t siz e o f th e importin g counti y provide s stimulu s t o trad e i n manufactures . H K Th e percaplt a Incom e o f th e national s i n th e importin g countr y - a prox y fo r taste s - an d th e trad e volum e mov e i n th e sam e directio n indicatin g positiv e relationship . I n orde r t o determin e th e statistica l validt y o f th e hypotheses , th e followin g doubl e lo g linea r econom.etri c mode l comprisin g regressoir s correspondin g t o eac h hypothesi s wa s specified . X . . = X + xA. . + XT). . + X"Y . + X.,Y . ij 1 ij 2 ij 3 J ^ J + U . . wher e X. . = lo g o f th e export s o f manufacture d good s "^ o f countr y "i " t o countr y "j " Y. . = lo g o f th e absolut e differenc e o f per- " ^ capit a income s o f th e tradin g partners , th e Linde r variabl e D . . = lo g o f th e shippin g distanc e betwee n •'•' ' countrie s "i " an d "j " - a prox y fo r th e transportatio n cos t Y . = lo g o f th e percaplt a incom e o f importin g • ^ countr y "j " Y . = lo g o f th e G.N.P . o f countr y "j " U. . = th e stochasti c terr a o f th e functiona l • ^ relation s i = 1 , 1 ^ j = 1 , .68 ; 1 , 5 7 fo r Australia . Th e performanc e o f Linde r variable , i n isolatio n o r i n conjunc tio n wit h othe r variables , i s belo w statistica l acceptanc e leve l an d decisivel y belo w th e theor y formulatio n strengt h attribute d t o i t b y

Linder

. Th e empirica l evidenc e refute s hypothesi s 1 concernin g th e A preferenc e similarit y proposition , and , furthe r fail s t o suppor t hypothesi s 4 regardin g th e contributio n o f individua l tastes . Th e marke t size , hypothesi s 3 » emerge s a s a stron g trad e stimulatin g forc e whil e th e transportatio n cost , hypothesi s 2 , seem s t o functio n a s a powerfu l trad e resistanc e variable . xxxxx x

ALISARH MUSLtH

ALI G Jul y 27
, 197
6 Thi s I s t o certif y tha t thi s thesi s i s th e origina l wor k o f th e candidat e don e unde r m y supervisio n an d i s suitabl e fo r submissio n fo r th e awar d o f Ph.D . degre e i n

Sconomics

. I . , • - > "^s. ) Kishwa r Shabbi r Khan ) Prof. & Head, Department of Bconomics

DEMAND PATTERN HYPOTHESIS: LINDER

A N EXPLANATIO N O F INTERNATIONA L TRAD E

AJLiiliAKU

. MUbLii M UWlVEKblT X

ALIGAR

H Banke y -J,. Sharm a

PREFACE

"Give n a n opportTinity , Mr . Shaxm a wil l contribut e economi c ideas " wa s th e caree r openin g recommendatio n b y Prof . M.S . Kha n o n th e admis sio n applicatio n i n 1964
. I t compelle d m e t o matc h ray potentia l t o hi s expectationa l leve l an d serve d a s a fountai n o f inspiration . I t provide d opportunit y the n t o stud y alaroa d an d enable d m e no w t o pursu e th e presen t study . Th e lac k o f m y ric h literar y vocabular y o r th e clos e intimac y wit h th e mathematica l languag e stan d i n m y wa y o f expressin g m y grati tud e t o Prof . K . Kha n i n wo3?d s o r q.uantif y i t i n exactl y measurabl e units . M y limite d mean s kee p m e fro m achievin g th e desire d goa l o f findin g th e correc t expressions . I a m equall y gratefu l t o Dr . N.R.V . Murthy , m y colleague , c o - autho r an d th e mode l o f manneris m wh o a t time s rescue d m e fro m sinkin g t o th e botto m o f frustration . I a m thankfu l t o Dr . Lewis , Directo r o f

Compute

r Center , Jackso n Stat e University ; Prof . Iyengar , Departmen t o f

Compute

r Science , Jackso n Stat e University ; Prof . Hoftyzer , Sout h Carolin a

University

; Prof . Stern , Universit y o f Michiga n an d Dr . Do n W . Arnold ,

Norther

n Illinoi s Universit y fo r th e valuabl e assistanc e i n on e for m o r th e other . I a m als o thankfu l t o Mis s Mim s fo r he r assistanc e i n makin g copie s o f th e fina l product . I t woul d b e ungratefu l t o ignor e Lat a Sharm a an d Panka j Sharm a wh o helpe d m e a grea t dea l i n collectin g ra w dat a an d feedin g th e processe d one int o th e computer .

Briefly

, th e fina l produc t i s th e contributio n o f variou s person alitie s whil e th e responsibilit y fo r error s i s mine .

CHAPTE

R II I

CHAPTE

R I INTRODUCTIO N 1

Classificatio

n o f Trad e Theorie s 1

Hypothese

s 3 Scop e an d th e Organizatio n 6

CHAPTE

R I I COMPARATIV E (COST ) ADVANTAG E 1 0

Theoretica

l expositio n , , 1 0

Critica

l Appreciatio n 1 3

Empirica

l Evidenc e .1 8 FACTO R PROPORTIO N ACCOUN T O F TRAD E 2 ?

Introductio

n 2 ? Linea r Homogeneou s Productio n

Functio

n 2 8 Facto r Intensit y 3 2 (a ) Physica l Definitio n 3 2 (b ) Pric e Definitio n >* •

Heckscher-Ohli

n Theore m 4 0

Critica

l Appreciation . 4 3 RECEN T TRAD E THEORIE S 5 3 A - Availahilit y Theor y ( Kravis ) 5 3 (a ^ Natura l Resourc e Component....... . 5'* ' (h ) Technologica l Progres s 5 8 (c ) Produc t Differentiatio n 5 9

Critica

l Appreciatio n an d Empirica l

Evidenc

e 5 9 B - Produc t Lif e Cycl e Theor y 6 2 (a.) Ne w Stag e 6 3 (h ) Maturin g Stag e 6 4 (c ) Standar d Produc t .6 4

Critica

l Appreciatio n an d Empirica l

Evidenc

e 6 5

CHAPTE

R V LINDER s PREFERENC E SIMILARIT Y THEOR Y 7 1

Graphica

l Expositio n 7 5

Critica

l Appreciatio n 77

Domesti

c Demand - Graphica l

Demonstration

. 8 1

CHAPTE

R I V

CHAPTER VI PREFERENCE SIMILARITY PROPOSITION 85

Evidenc

e an d Investigatio n 8 5 A - Empirica l Evidenc e s Deman d

Structur

e Similarit y ...8 6 B - Percapit a Incom e Base d Trad e

Intensit

y .8 ? (a^Llnder - Impor t Propensit y Matrix...8 7 (b)Hirsh-Le v Stud y 8 8 (c)Sailor-Qureshi-Cros s Stud y 9 1 (d)Hoftyze r Stud y 9 3 (e)Sharma-Murth y Stud y 9 ^ C - Empirica l Investigation . 9 6 (a)Mode l Specificatio n .9 6 ("b)Sampl e Siz e 10 0 (c)Dat a Source s 10 2 Test : Preferenc e Similarit y Hypothesisl0 3 Test : Competin g Trad e Hypothese s Il l (a ^ Llnde r Variabl e 11 5 (b ) Distanc e Variabl e 11 5 (c ) Percapit a Incom e Variabl e 11 ? (d ) G.N.P . Siz e 11 ? (e ) Comprehensiv e Treatmen t II 8

CHAPTE

R VI I CONCLUSIO N 12 5

APPENDICE

S 13 6 A - Australi a 13 6 B - Belgixun-Lexumbour g 13 9 C - Canad a 1^ 2 D - Denmar k 1^ 5 E - Franc e I W F - Germaji y 15 1 G - Ital y 15 4 . H - Japa n 15 7 I - Netherlan d I6 0 J - Norwa y I6 3 K - Spai n I6 6 L - Swede n I6 9 M - Unite d Kingdo m 17 2 N - Unite d State s 17 5

BIBLIOGRAPH

Y 17 8

TABLES

TABL E TABL E TABL E TABL E TABL E TABL E TABL E TABL E TABL E TABL E TABL E TABL E TABL E TABL E TABL E TABL E 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6

Synopsi

s o f th e Theorie s o f Internationa l Trad e 3

Empirica

l Verificatio n o f th e Stric t Ricardia n

Hjrpothesi

s 2 1 Labo r Productivit y Ratio s an d Expor t Pric e Ratio s (Unite d States/Unite d Kingdom ) fo r 193
7 an d 195
0 2 2 Labo r Productivit y Ratios , Expor t Pric e Ratios , Uni t Labo r Cos t Ratio s an d Wag e Rate s Rati o (Unite d States/Unite d Kingdom ) fo r 195
0 2 3

Relationshi

p Betwee n Labo r Productivit y Ratio s an d Expor t Pric e Ratio s 2 5

Relationshi

p Betwee n Uni t Labo r Cos t Ratio s an d Expor t Pric e Rati o 2 5

Critica

l Value s o f w/ r an d th e Correspondin g K/ L ....4 5

Rankin

g o f Industrie s b y Capita l Intensit y 4 6

Domesti

c Capita l an d Labo r Requiremen t Per-millio n

Dollar

s o f U.S . Expor t an d o f Competitiv e Impor t

Replacement

s .4 9 Prewa r Ratio s o f Outpu t Pe r Worke r Weekl y Earnings , Wag e Costs , an d Exports , U.S . t o U.K. , Selecte d

Industrie

s 5 6

Coefficien

t o f Variatio n fo r Change s i n Incom e an d

Coefficien

t o f Correlatio n fo r Consumption-Incom e

Functio

n fo r th e Selecte d Countrie s 6 3

Characteristic

s o f th e Produc t Lif e Cycl e 6 6 Ran k Correlatio n Betwee n Commodit y Characteristic s an d Associate d Nationa l Attribute s 6 9

Regressio

n Estimate s fo r 7 9 0 i j Dolla r Valu e o f Trad e fo r Selecte d Countries,1966....9 1

Export

s o f Manufactures : Percentage s an d Sampl e SizelO l TABLE 17 Regression Results: Strictly Linder Hypothesis ...104 TABL E 1 8 Regressio n Results : Linde r Variables - Relativ e

Performanc

e .10 7 TABL E 1 9 Regressio n Results : Linde r an d th e Distanc e

Variable

s 11 2 TABL E 2 0 Regressio n Results : Linde r Variabl e i n Associa tio n wit h Distance , Taste s an d th e Marke t Siz e

Hypothesi

s 11 3 TABL E 2 1 Origi n o f G.N.P . fro m Exports : Unite d Kingdo m 11 6 TABL E 2 2 Comparativ e Regressio n Result s 11 9 *** *

CHAPTER I

INTRODUCTIO

Internationa

l economic s i s anotomize d int o tw o majo r branche s representin g internationa l monetar y economic s an d internationa l trad e theor y usuall y designate d a s th e pur e theor y o f trade . Th e fonae r addresse s itsel f primaril y t o th e proces s o f adjustmen t i n th e balanc e o f paymen t b y mean s o f aggregativ e approach . Th e pur e theor y o f trade , o n th e othe r hajid , assume s balanc e o f paymen t eq.uilibriu m an d ful l employmen t an d attempt s t o describ e th e "condition s o f eq[uilibriu m 2 i n th e 'real ' magnitude. " Effectively , mone y play s extremel y un -

3 important role. It makes use of the theories of value and welfare

an d concentrate s heavil y o n th e volume , terms , directio n an d th e struc tur e o f trade . Simila r t o economi c theory , th e pur e theoi: y o f inter nationa l trad e handle s th e problem s o f bot h th e "positive " o r "objective " characte r an d "welfare " o r "normative " nature . W.M . Gordon , Recen t Developmen t i n th e Theor y o f Internationa l Trade : Specia l Paper s i n Internationa l Economic s No . 7 (Internationa l

Financ

e Section : Princeto n University,I965) ; p . 2k.

2 Gottfried Haberler, A Survey of International Trade Theory;

Specia

l Paper s i n Internationa l Economic s No . 1 (internationa l Financ e

Section

: Princeto n University , I96I) ; p.4 . 3 J . Vanek , Internationa l Trad e : Theor y an d Economi c Polic y (Richar d D . trwin , Inc. , Homewood : Illinois , I962) ; p.179 . M . Chacholiades , Th e Pur e Theor y o f Internationa l Trad e (Aldin e Publishin g Co. , Chicago , 1973)
; Jagdis h Bhag>fati , "Th e Pur e Theor y o f Internationa l Trade : A Survey" , Economi c Journal , LXXIV , (Marc h 1964)
. - * I n recen t year s som e moder n version s hav e als o appeare d i n th e litera - ture . A synopti c vie w o f thes e theorie s i s presente d i n tabl e 1 . Al l th e theorie s vie w trad e a s th e offsprin g o f a n economi c o marriag e betwee n produc t characteristi c an d nationa l attribute . Th e firs t si x theorie s conside r trad e a s a compensatin g devic e fo r struc tura l variation s o n internationa l level . Th e movemen t o f goods , i n a sense , function s a s a substitut e fo r th e existin g facto r differentials . Bu t th e las t preferenc e similarit y theor y view s similarit y o f deman d pattern s amon g th e tradin g partner s a s a n essentia l elemen t fo r th e • ^ Davi d Ricardo , Th e Principle s o f Politica l Econom y an d Taxatio n (Cambridge : England , 1911
, firs t publishe d i n 181?)
. El i Heckscher , "Th e Effec t o f Foreig n Trad e o n th e Distributio n o f Income, " Readin g i n th e Theor y o f Internationa l Trad e ed . b y H.S . Elli s an d L.A . Katzle r fo r th e America n Economi c Association(Philadel phia : BlaJciston , 19^9) ; Berti l Ohlin , Interregiona l an d Internationa l Trade , Ha3ryar d Economi c Studies , Vol.3 9 (Cambridge ; Massachusettes :

Harvar

d Universit y Press , 1933)
• 7

Heckscher-Ohlin'

s facto r endowmen t theor y o f trad e rank s amon g moder n versio n accordin g t o prominen t economist s lik e Haberler , Vane k

Hufbauer

, Johnson , Kindleburge r an d man y others . Th e presen t stud y follow s thi s pattern . Q G.G . Hufbauer , "Th e Impac t o f Nationa l Characteristic s an d

Technolog

y o n th e Commodit y Compositio n o f Trad e i n Manufacture d

Goods,

" Th e Technolog y Facto r i n Internationa l Trade , ed . b y Raymon d Verno n fo r Nationa l Burea u o f Economi c Researc h (Ne w York : Columbi a

Universit

y Press , 1970)
. PP E H O H E H O M O E H O g CO o -p • P W C 1=1 0) O c o •H tiD -

P M ti CD 0)

P 4 M ;3 M -

P 0) O

P n

J :3 tH rCl 13

• H C M n

J p e P cd CH

O rt w C P o U •H O P P H 0 3 " 12 ; < D >> p •H tJ O M S O S - H O P ^ w •H r-\ U ci 0) •H P P O C nj , P ^ •H O M 0 ) o x : P PHTH c S o i H O j o •H m >>5 x : PH t H o Q) o c n3 Ti C 13 , a rf 0 ) > •H

P cd r-\

Q ) w c 0) p c •H r H t d

P •H

P H n J o C H o p M o (1 > x: p o p t o Td 03 a > rH ! H o ,Q c d rH " CO x l o o bD Q) > •H W C 0 ) t H P o 0 ) o a rf PHT:! X (D O P w •Td rt 0) K r H J

H O rQ

o j t ^ ( 1 r-i a P ^ 0 3 o •H PH P o 5 o c •H r H x : o ^ ? 0) ^ o m •a o (D w j ^ o p o nJ fe . 1-1 0 5 ^ W a o •H P M O P H O u FM c •H M 3 03 C r H :: ! ,Q o J •• . w Tlf o o ba C H o p ^ o PH X Q ) H ^ <

U 03 Q >

O n J t o •H H C (Q Q) t o t J P Q) 0) C t H C - H O - H 1 M n 3 i

H PH fH rH p -H tH ^

o > , t o rH Q > ^ ^ H O b D O C -H -s-^t ^ E! TJ O ^ 1 3 03 r-i t i 0 H H • H ^ to C ;3 " H o 0 o a ci ;3 G PHX) r ^ er f X o3 (D H 0) (U O > fl P •H C P O C O ci m T:) rH ^ 03 0 Q ) 0 K pHr H C O p T d c c 0 H5 e 0 E! M o c •H ^ O 3 P - H CJ < O P 0 r- J 3 M Ti rQ O T H H M M rH PH P • H t o JiJ "HH -H C O O - d ^ & P 03 0 3 i- ^ M S 0 h p • • H d CO x; ^ -H 0 p q > o

3 03 ts

- ^ CH W -0 bO •H - G P C -H c 3 rCl 0 3 • » C O ' d o o bO • h

C •H

^ 0 0 S O 1 & 6 03 c 0 t o A

J o a 0 0 0 0

C O o ^ C • H J ^ •H 1 3 o < 0 J H C O x i o o t(0 H o PH X • 0 CO r H C O r H 0 - H P • y o t o 6 O ^2 U 0 PH^H • H

P o3 S: bO oS

x : pq , •r-J o

3 Is T:)

H o3 ,a i-q w w " pq

C O r H r-{ • H 4r f CO C rt 6 3 W . CQ 1 C O o 3 0 U O o c P T-{ 0 f ^ > 0 •H T:) C J C 5 3 Tj C i: f O 0 o o

5 CO T)

• H O 5 H P Pi 0 ^ C O f H 'd o 3 O e o bD 0 e t H o o x: p 0 fH bD O M PH 03 X i-^ l 0 0 H o

3 o c: CO -H

t H t o O O •H p e c o 0 S^ P O X O W 0 b

D G •H

t o 0 0 0 t a M 0 Q H 0 - ; 3 a a '^^^ x: :3 o w !> 5 e o fl o o w 0 H o

3 o CO

• c^ t o o o bO 0 O e t H p o o Xi g H M 3 rH O P c" PH 0 e X !H to 0 P o a - P 03 0 P r H 0 C O o 3 > G O -H O C O O O : 3 O TZ f M p fl 0 O TJ CO O E! s ^ 3 -H Tf p 0 0 P O • !H 0 3 0 ^ T:! rH bD fH O 03 S 03 M O •H e PH CO "T )

G 03 C

o a -H O P • H d p x> O 'H ; 3 ^ Tj P O C O U -ri PnTi 0 • H P O o o •p - P W C x )

» P

• H TZ f O M g O S -H O 4 J o t o •H H f H n 3 (1 ) •H -p - P O C 0 3 a > M M nj w x ; W o M - p c IB a o PH o ^ PI T i < D - P O 0 ) r S 0 ) C O c o •H .-:^ ^ w o o 3 xi o fH u 0) s 3 w c o o u -p 0 ) pHr Q C O p (1) r Q ri C o •H - P nj O • H - P W • H £ 1 P H o CO Q ) o a nJ -P M ^ nd o •H e o a o o w c o •H • P :3 - p f-{ - p w m - p f H O n i > > -P •H O n H H P i e •H C Q • M W - P u o & 0 H oj C TH " H Q ) X ! 4^ e o u tH H O O ft^ e H " H o ( U O u a o •H - P O

0 bO'd nJ -P CQ

. ^ o U PI --P x : t)0 •H H > > iH rH a •H o CD P i w Q) • > CO • p u o Pk X 0) m •n o o bO u a> e 3 CQ

G O o

• CO ti o o bO f H 0) s ;3 C O

C o o

o rl C O - P M n

3 0) CO -P

^ H M C O O O M O 3 0 ) r d xi CO O -P T: ) f ^ o O P< p U bo M o (U S - p C O 0 ) n J 0 ) C r H b O " i tH •- 5 O Q ) b p f ^ oJ T) E3 'H ci o :i • CO - p U o s ^ 0) C D - p o e o u Fk o q -p t>5-p rt M H g O CD P i U f> . X H CD -P U C O n J C ;

3 H ccJ e

C •^ o G "H H 0) P>

o j O • H H ; J P > cc J - d AGO CD O (-1 ;: ! - H p < c^f- P ( D c d O C O G - P £ H ^ n " CD O C O : 3 - d > , 2 C D C D u ;i -p c d C D C H

G o G M CD

l > I n

J (d tH bO -P

- - m M M ccj Q J C D r H A J C b

O O CO 3

r i o o EH PH PI r H c d o •H b

O o H

o c O PH C D n i E- i b D . "^ x : CD s fl.^ CD^ r Q C O ; 3 ( D M a > cJW 0 ^ -p C i ," 5 "H ; 3

C (rt

fc > > rH J H o J 0 - d C n j

G o •H

P nJ O

•H - P C O •H x: Pi o to a o •rH H ^ c d •H - P C 0 M 0 J H tH • H o G O c 0 > •

» Xi CO

C O • d o o bD • d 0 H- > c d T^ P > G 0 M 0 ^ H C H • H • d > " o + > M o + > M O at o -p c a TJ oJ C D r H G

O •H

- P o i o •H - P C O • H pP •H - d O ^ ^ o o t H o x : bO 7i Cd X I o -p CO •

» CO

r-i M H •H K 0 r H O !> > O • P O :i - d o u P4 • VO 0 > o OS r H u J3 -d G nJ P CO C H O C O 0 • H c O O G 0 0 S : P> 0 rQ 0 > •H C O G 0 P > G •H • P CB O e CO • H 0 • d oj 0 0 t H u° H^ CO O 0 f.t -P -P • CO G 0 3 M O O 3 •H O +> S O o G :3 G 0 M O 0 -P O S C O 0 p > 0 O ^ 1 r Q - H n j S H 0 O • H > G e - H o •H CO O C O G 0 0 >jP ' 4 J r H G G x; -H 0 b 0 U •H -P 0 x ; C O C H n j C H U 't-i 0> -H E- I G 0 0

S P" 0

X > > > -P •H ! 4 oj i

H •H

e •H C O M 0 - d G •H t- q 0 o G 0 f H 0 O r H - d f H O t

H CO H-5

• P G 0 fH O ^ O ' H M piH ^ c d X o S 0 3 T: ) 0 -O S H J S H o f H Pix : o PlTd 0 fi G x : •H cd P> >> -p • H f H c d r H C H - H

0 € ^H -H

P H . {>- C O r» 2 0 Sx : , O EH H . H O c d O 'i-i -d a fi -

9 x; -H G g O O 3

0 r G H EH - M O C O 0 O • d - d > GO n J O - d • " CJ3 G M C O o o o - d e >

H •H 0 J>, ^

P - ! 4 n J > W 3 Cd 0 • H + ^ ss ; !H o !>> 0 oj X'' - ' - P C H o 3 • < ; nj G Td CO M n J 0 ^ o 3 S x : - -O G 0 •H T:! H o

3 nJ 0 M G -d EH

x : o u cd 0 O c d C O •ri U r-\ - p E- i <

3 nj G

I s t H O O -H C H + > O G n J O G +> -H M O -p 0 n J - H - P P < C O G e o H 0 " o •H e o G o o w • /-•"N C H O H P I O { V e G l C

A 0 O -H1 3 rH x: o nj H fH = t^, O

H ^ -

P -•HO

M - d n j 0 O fe X I O S CH O O 3 r

H W 0 o x: G • P> X!

o o - G 0 C J O H 0 - f H C O 3 C O m 0 ^ -^^^ G t>> O H^ •H -H - P C O n j U !z ; 0 > 0 ft •^ M p pi 0 o ^ 3 o CO -5- existenc e o f trade .

DlcLgramatically

, a n eastwar d movemen t o n absciss a measiire s increas in g nationa l attributes , industria l sophisticatio n whil e th e ordinat e represent s relativ e price . Good s p , , . FICUR E 1 ar e distinguishe d b y connectin g price characteristic s suc h a s commodit y standardization . I n term s o f th e firs t se t o f theories ; on e t o six ; countr y "A" , relativel y les s sophisticate d i n nationa l attri butes , enjoy s a comparativ e advantag e i n th e productio n o f goo d 1 . Countrie s "B " an d "G " ar e mor e efficien t i n th e productio n Goo d 1 Goo d 2 Goo d 3 B

Countr

y Countr y Countr y A B C Natio n - attribi j o f commoditie s 2 an d 3 respectivel y whic h embod y highe r leve l o f industria l technolog y an d sophistication . Trad e permit s inflo w o f nonexisten t product s i n respectiv e countries . Briefly , trad e grow s amon g countrie s "A" , "B " an d "G " an d th e good s mov e fro m th e plac e o f abundanc e i n th e directio n o f scarcity . 9 Th e "preferenc e similarity " theor y warrant s a differen t inter pretatio n o f thi s diagram . Eac h o f thes e countrie s produce s al l th e thre e goods . Th e trad e flo w amon g thes e coxintrie s is , however , errecti c

S.Burensta

m Linder , A n Essa y o n Trad e an d Transformatio n (Stockholm : Almqvis t an d Wicksell , 19^) . regardless of the size of the trading partners and the absence of trad e restrictions . Th e marke t barrier s axisin g fro m sophisticatio n leve l base d deman d disparit y lea d t o extinctio n o r neaj r extinctio n o f trad e potentia l betwee n countrie s "A " an d "G", fo r example . Countr y "A " trade s wit h countr y "B " a s it s deman d structur e partiall y resemble s th e deman d patter n o f it s tradin g partner . Th e trad e amon g countrie s "B " an d "G" , however , grow s i n intensit y du e t o "overlapping " deman d reflectin g th e preferenc e similarity .

Linder'

s "preferenc e similarit y theory" , als o designate d a s th e "deman d patter n hypothesis, " i n essence , divide s th e entir e trad e int o tw o segment s representin g trad e i n ra w material s an d th e trad e i n manufacture d goods . Trad e i n ra w materials , h e argues , obey s facto r endowmen t dictum . Bu t th e th e trad e i n manufacture d goods , h e stresses , i s mor e intens e amon g tradin g partner s whic h exhibi t simila r deman d pattern s a s oppose d t o dissimila r facto r endowment s envisione d b y th e facto r propotio n accoun t o f trade . Man y factor s contribut e t o th e preferenc e (demand ) similarit y bu t th e predominan t preferenc e shapin g influenc e come s fro m percapit a income . I n short , th e percapit a incom e similarit y generate s preferenc e similarit y whic h i n tur n stimulate s o r intensifie s th e trad e potential .

Hypotheses

; Th e preferenc e similarit y theoir y ha s create d a grea t dea l o f interes t an d controvers y amon g economist s inasmuc h a s i t advance s tw o relate d propositions . Th e percapit a incom e similarit y serve s dua l pujrpose . Firstly , i t cause s demam d structure s o f th e tradin g partner s t o resemble . Secondly , i t emerge s as/ a trad e creat in g o r trad e intensifyin g forc e amon g th e nations . Sinc e Linde r chiefl y -7- consldere d th e latte r aspect , th e presen t stud y addresse s Itsel f primaril y t o th e percapit a incom e similaxit y base d trad e intensit y i n manufacture d goods . Effort s ar e directe d t o determin e th e theoretica l validit y o f Linder' s propositio n an d verif y it s empirica l significance . Th e followin g hypothesi s i s formulate d t o rende r precisio n an d se t th e guid e line s t o th e cours e o f study . H ^ Th e percapit a incom e differential s an d trad e intensit y bea r invers e relationship .

Percapit

a incom e differential s i n th e presen t contex t refe r t o th e disparit y o r ga p i n th e leve l o f averag e income s o f th e national s o f tradin g partner s whil e trad e intensit y Implie s th e siz e o r voliim e o f trade . Th e percapit a incom e differential s functio n a s a trad e arrestin g forc e whil e it s resemblanc e lead s t o Intensificatio n o f trad e i n manufactures . I t must , however , b e mentione d tha t th e siz e o f th e trad e i n a countr y i s no t functionall y relate d onl y t o th e percapit a incom e similarit y envisione d b y Linde r bu t als o t o th e transportatio n cost , th e marke t siz e an d th e taste s o f th e resident s o f importin g country . Th e followin g additiona l hypothese s are , therefore , develope d t o examin e th e trad e determinin g influenc e o f thes e factors . H " Th e transportatio n cos t serve s a s a marke t barrie r t o th e trad e flow . H " Th e marke t siz e o f th e importin g countr y provide s stimulu s t o trad e i n manufactures . H K Th e percapit a incom e o f th e national s i n th e importin g countr y - a prox y fo r taste s - an d th e trad e volum e mov e i n th e sam e directio n indicatin g positiv e relationship . -8- Th e functiona l relationshi p betwee n hypothese s 1 , 2 an d th e trad e volum e i s invers e whil e i t i s positiv e betwee n hypothese s 2 , 3 an d th e siz e o f trade . Th e respectiv e regressio n coefficient s mus t reflec t thi s tendenc y t o satisf y theoretica l criteria . Scop e an d Stud y Organization : Ric h literatur e o n th e pur e theor y o f trad e i s flavore d wit h occasiona l dynamis m generall y i n harmon y wit h th e traditiona l stati c comparativ e fragranc e o f eeirlie r versions . Th e presen t stud y is , however , a happ y blendin g o f earlie r doctrine s an d th e recen t propositions . I t begin s wit h th e arialytica l introspectio n o f th e classica l theor y o f comparativ e (cost ) advantage , chapte r 2 , followe d b y a comprehensiv e evaluatio n o f th e Heckscher -

Ohlinia

n facto r endowmen t doctrin e o f trade , chapte r 3 . I t furthe r examine s som e o f th e recen t trad e version s stemmin g fro m Leontief' s criticis m o f th e facto r endowmen t theor y o f trad e i n chapte r ij- .

Theoretica

l aspect s o f Linder' s preferenc e similarit y ax e analyse d i n chapte r 5 whil e th e followin g chapte r examine s th e statistica l validit y o f Linder' s unorthodo x percapit a incom e base d preferenc e similarit y an d it s trad e determinin g attributes . I t mus t b e noted , however , tha t th e economist s ar e divide d o n th e point . Som e conside r i t conceptuall y strong , logicall y sound , theoreticall y consisten t an d empiricall y vali d whil e other s fin d i t pregnan t wit h deficiencies , theoreticall y weak , inferentiall y illusiv e an d statisticall y untenable . Th e presen t stud y attempt s t o gathe r statistica l evidenc e t o analys e Linder' s I . Kravis , "Availabilit y an d othe r Influence s o n th e Commodit y

Compositio

n o f Trade, " Journa l o f Politica l Economy , Volum e 6^ ^ , (April , 1956)
. -9- preferenc e similarit y propositio n "b y employin g mos t recen t ti^ e data . I t i s wort h mentionin g tha t th e preferenc e similarit y ha s bee n interprete d t o mea n tha t th e (l ) percapit a incom e similarit y lead s t o similarit y i n th e demsin d structure s o f th e tradin g pairtners , an d tha t th e (li ) percapit a Incom e resemblanc e o f th e tradin g partner s result s I n th e trad e intensity . Th e scop e o f thi s stud y i s limite d t o th e latte r aspec t o f Linde r hypothesi s a s th e forme r i s no t i n complet e harmon y wit h th e spiri t o f Linde r thesis . Th e study f however , expand s th e scop e o f investigatio n b y includin g th e consideratio n o f transportatio n cost , th e siz e o f marke t an d individua l taste s o n th e trad e volume . G.C . Hufbauer , "Th e Impac t o f Nationa l Characteristic s an d

Technolog

y o n th e Commodit y Compositio n o f Trad e I n Manufacture d Goods, " Th e Technolog y Facto r I n Internationa l Trade , ed . b y Raymon d Verno n fo r Nationa l Burea u o f Economi c Eesearc h (Ne w York : Columbi a Universit y Press , 1970)
. /

CHAPTER II

COMPAEATIV

E (COST ) ADVANTAG E Widel y regarde d t o hav e originate d wit h Th e Principle s o f

Politica

l Econom y an d Taxatio n (181?) , th e theor y o f comparativ e (cost ) advantag e i s largel y associate d wit h th e nam e o f Davi d Rlcardb .

Economi

c historian s have , however , debate d whethe r priorit y fo r th e us e o f comparativ e advantag e shoul d b e give n t o Rlcard o o r t o Torren s wh o cam e clos e t o enunciatin g th e law , I815 , befor e th e publicatio n 2 o f Rlcardo' s work . ChlpmaJi , however , advocate s tha t th e "credi t fo r 3 th e discovery " o f comparativ e advantag e "shoul d g o t o Torrens. "

Regardles

s o f it s origin , Rlcard o i s th e firs t write r wh o systemati - call y applie d comparativ e advantag e t o trad e betwee n countries . H e develope d a numbe r o f fragmentar y trut h int o coheren t doctrin e aji d hi s succes s i n transformin g th e principl e i n a theoretica l constmic t Davi d Rlcardo , Th e principle s o f Politica l Econom y an d Taxatio n (Cambridge : England , 1911
. firs t publishe d i n 181?)
. J . Viner , Studie s i n th e Theor y o f Internationa l Trade(Harpe r an d Bros. , Ne w York , 193?)
, pp.^l-? ; P . A . Schximpeter, ; Foundation " o f

Economi

c Analysi s ( Harvar d Economi c Studies , Cambridg e Mass : Hajrvar d

Universit

y Press , 195^
) pp.607-8 ; Joh n S . Chipman , " A Surve y o f th e Theor y o f Internationa l Trade : Par t I , Th e Classicla l Theory, "

Econometrlca

, Vol . 3 3 No . 3 , Jul y I965 , pp.480-82 . 3 J.S . Chipman , " A Surve y o f th e Theor y o f Internationa l Trade : Par t I , Th e Classica l Theory, " Econometrlca , Vol . 3 3 No . 3 , Jul y I965 . 4 / S.J . Wells , Internationa l Economic s ( Ne w York : Atherton , Inc . 1969
) p . 26
. -XX- fa r exceed s Torrensia n efforts . Admittedly , "th e pur e theor y o f inter nationa l trad e begin s wit h Rioardo' s Theor y o f Comparativ e Costs. "

Ricard

o advocate d th e principl e o f comparativ e (cost ) advantag e b y askin g a q^uestio n tha t i f Tw o me n ca n bot h mak e shoe s an d hats , an d on e i s superio r t o th e othe r i n bot h employment ; bru t i n makin g hats , h e ca n onl y excee d hi s competito r b y one-fift h o r 2 0 percent , an d i n makin g shoe s h e ca n exce l hi m b y one - thir d o r 3 3 percent ; wil l i t no t b e fo r th e interes t o f both , tha t th e superio r ma n shoul d emplo y himsel f exclu sivel y i n makin g shoes , an d th e inferio r ma n i n makin g hat s ./ - Th e structura l mode l o f th e classicists , however , flow s fro m th e

Ricardia

n celebrate d England-Portuga l cloth-win e exaunple :

Countr

y Labo r cost s o f producin g win e (gal ) Clot h (yds )

Englan

d A 12 0 10 0

Portuga

l B 8 0 9 0

Portuga

l ha s a comparativ e advantag e ove r Englan d i n th e produc tio n o f win e a s compare d t o th e productio n o f cloth . Ver y briefly , "th e rati o o f th e cos t o f productio n o f on e goo d i n bot h countries " i s compare d wit h th e "rati o o f th e cos t o f productio n o f th e othe r goo d i n bot h countries. " Algebriacally , i f countr y A ha s a an d a output-facto r rati o an d countr y B ha s b a n b output-facto r n m n

Gottfrie

d Haberler , A Surve y o f Internationa l Trad e Theory ;

Specia

l Paper s i n Internationai l Economic s No . 1 (internationa l Sec .

Princeto

n University , I96I ) p. ?

Ricardo

, I89 I ed . p . II6 .

Gottfrie

d Haberler , Th e Theor y o f Internationa l Trade(London ;

Willia

m Hodg e an d Co . Ltd . 1956)
, p.129 . -12- rati o i n th e productio n o f commoditie s m an d n , countr y "A " wil l impor t --Ci ] n and export m if a m a n > \ b n Th e Ricardia n tw o country , tw o commodit y an d singl e (labor ) facto r mode l i s base d o n th e labo r theor y o f value . I n a marke t situa tio n describe d b y constan t retur n t o scale , fre e interna l mobilit y o f labo r an d perfectl y competitiv e good s an d facto r markets , th e pre-trad e domesti c commodit y pric e rati o wil l b e a functio n o f scale-fre e outpu t facto r ratio . However , th e relativ e pric e rati o an d th e structur e o f productio n an d trad e i n a worl d characterise d b y internationa l im mobilit y o f facto r (labor ) an d differentia l productio n function s i n tradin g countrie s wil l b e determine d b y th e relativ e facto r productivit y ratio . Th e lon g ru n averag e cos t o f productio n wil l b e give n b y equatio n

Averag

e cos t o f "m " = w a Y

Averag

e cos t o f "n " = w a \ -[2] wher e ra = Commodit y unde r productio n n = secon d commodit y unde r productio n a = labo r unit s require d t o produc e on e uni t o f th e firs t commodit y m , a = labo r unit s require d t o produc e on e uni t o f th e secon d comjnodit y n , w = th e mone y wag e rate . Sinc e th e coefficient s o f a an d a ar e constauit , th e suppl y curve s m n "-^ mus t shap e horiizontall y a t w a an d w a levels . And , th e lon g ru n -13- equilibriur a price s o f commoditie s m an d n (Pr a an d Pn ) mus t b e P m = w a ; P n = w a r3 l m n ' - - • wherea s th e relativ e price s o f m an d n ar e dependen t upo n th e relativ e inpu t facto r productivit y requirements , P a m m P = = [4 ] P a n n Th e productio n functio n implicitl y employe d "b y Ricard o i n hi s

England

- Portuga l exampl e i s give n h y th e equatio n 0 = T( L ) [5 ] wher e 0 = th e quantit y o f outpu t o f commodit y "ra " L = th e quEintit y o f labo r use d t o produc e a give n amoun t o f commodit y "m" , an d T = a constan t reflectin g productivit y o f labor . Th e foregoin g Ricaxdia n mode l i s overl y restrictiv e an d it s use fulnes s ha s bee n debate d b y economists . Comparativ e advantage , however , stil l remain s a focu l poin t i n th e theor y o f trade . A close r examina tio n o f th e mode l an d it s empirica l verifiabilit y see m appropriat e a t thi s juncture .

Critica

l Appreciation ; Th e comparativ e (cost ) advantag e consider s labo r a s th e sol e inpu t componen t o f production , exportables-importables , an d overlook s th e contribution s o f lan d (rent ) an d capita l (interest) .

Ricard

o starte d ou t a s a stron g adheren t o f a n undilute d labo r theor y o f valu e bu t late r hel d t o i t a s a n adeq^uat e firs t approximatio n , -1^- o "9 3 percen t labo r theor y o f value, " afte r attack s b y Maithu s an d

Torrens

. Lan d wa s eliminate d fro m consideratio n a s th e margina l lan d doe s no t yiel d an y ren t and , therefore , fail s t o influenc e relativ e prices . Despit e comprehensio n o f margina l principle , Ricard o approach e d determinatio n o f relativ e price s purel y "fro m th e cos t o r suppl y 9 side. " I n th e absenc e o f deman d specifications , however , th e "ren t - les s margin " i s indeterminable .

Exclusio

n o f capita l (interest ) fro m inpu t componen t i n th e com modit y outpu t implicitl y amount s t o a timeles s consideratio n o f input - outpu t relationship . I t i s tantaanoun t t o assumin g existenc e o f infinit e deman d an d assumptuou s premanufactur e disposa l o f commodities . A n intro ductio n o f tim e elemen t int o th e analysis , therefore , create s unsur - mountabl e difficulties . Assumin g a positiv e rat e o f interest , th e averag e cos t o f a commodit y an d it s pric e ar e influence d no t onl y b y th e labo r inpu t content s bu t als o b y th e lengt h o f tim e fo r whic h i t i s embodie d i n th e production . I f on e worke r take s on e yea r t o produc e on e uni t o f commodit y "m " an d i t require s tw o year s t o produc e on e uni t o f "n" , th e relativ e pric e o f "n " i n term s o f "m " involve s interes t expens e i n additio n t o wsig e payment . I f th e wag e rat e i s $ w pe r year , p G.J . Stigler , "Ricard o an d th e 93
^ Labo r Theor y o f Value, "

America

n Economi c Review , Vol . ^8 , 1958
, pp.357-36? . 9 Ronal d Findlay , "Relativ e Prices , Growt h an d Trad e i n a Simpl e Ricardia n System, " Economica , Vol . ^1 , No . l6l , Februar y 197^
» pp . 1-13 . P.A . Samuelson , " A Moder n Treatmen t o f th e Ricardia n Economy , I an d II, " Quarterl y Journa l o f Economics , Vol . 73,1959
f pp.1-3 5 & 217-31
. -15- P m P n P n P m = = $ w $ w ( l + l) + w w ( l + i) + w w 2 + i -[6 ] wher e th e rat e o f interes t P n = th e relativ e pric e o f commodit y "n " i n P term s o f commodit y "ra" . Th e Ricardia n doctrin e assume s complet e interna l mobilit y o f labo r an d wage-pric e flexibility . Gonseq.uently , th e labo r i s distribute d i n variou s activitie s i n suc h a manne r tha t it s margina l productivit y i s equa l t o it s wag e i n al l productiv e areas . Implicitly , th e doctrin e stresse s homogeneit y o f labor . It s validit y depend s o n suc h u n - realisti c assumption s a s "al l labo r i s o f th e sam e quality , o f th e sam e irksomeness,.. . an d ther e i s fre e competitio n betwee n workers. "

However

, th e labo r i s neithe r perfectl y mobil e nationall y no r i t i s 1 2 completel y immobil e internationally . Th e regional , rura l an d urban , racia l an d occupationa l wag e differential s d o exis t i n economie s practic - 1 3 in g monetar y syste m an d divisio n o f labor . Mone y wsig e cost s i n

Haberler

, op.cit.,p.l26 . / .Das s an d B.L . Sharma , "Brai n Drai n Controvers y an d Lati n

America

n Scholars, " Sociologus , Jahrgan g 2 4 Volume/HEF T 2 Number , 197
^ ( Ne w Series). , Berlin , Wes t Germany . 1 3 •'^Rufu s B . Hughes , Jr. , "Internationa l Incom e Differences : Sel f

Perpetuation,

" Souther n Economi c Journal , Vol.XXVIII , No.1,Jul y I96I , p.4 . -16- genera l fai l t o reflec t relativ e facto r (la"bor ) cost s an d interna l mobilit y enable s on e grou p o f worker s t o enjo y mor e o r les s permanentl y a leve l o f remuneratio n whic h fai l t o reflec t an y rea l advantag e ove r Ik thei r fello w countryme n i n othe r sector s o f economy . Th e labo r theor y o f valu e assert s tha t good s ar e exchange d agains t on e anothe r accordin g t o th e relativ e ajnount s o f labo r embodie d i n them .

Quantitie

s o f goo d whic h hav e equa l price s embod y equal , amoun t o f labor . I n practice , however , good s ar e no t exchange d directl y agains t eac h othe r bu t agains t money . "Th e flo w o f internationa l trad e i s determine d directl y b y absolut e difference s i n mone y price s an d no t b y comparativ e difference s i n labo r costs. "

Accordin

g t o th e comparativ e (cost ) advantag e theory , th e necessar y

Countr

y Productio n o f good s Rati o m n A 10 0 20 0 1: 2 B 30
0 10 0 3: 1 conditio n fo r th e creatio n o f trad e i s th e differentia l homogeneou s facto r inpu t rati o i n a scal e fre e productio n o f trade d commodities .

Countr

y A Scal e B

Productio

n ra fre e 1,00 0 30
0 o f good s n 2,00 0 10 0 Rati o 1 : 2 3 i 1 1 ^ J.E . Cairnes , Som e Leadin g Principle s o f Politica l Econom y Newl y Expounde d ( Ne w York : Harpe r an d Brothers , 187^)
, pp . 66-68
. 1

5 -^ Haberler, op.cit., p. 131.

-17- Trad e continue s t o flouris h a s lon g a s th e facto r inpu t rati o continue s t o differ . Clearl y th e theor y assume s (l ) tradin g countrie s a s space les s points,therefore , zer o transportation , informatio n o r communica tio n costs , (2 ) th e cos t o f productio n remain s constan t a s th e compara tiv e advantag e ma y alte r o r disappea r i f th e increasin g o r decreasin g return s ar e permitte d t o operate , an d (3 ) th e theor y merel y set s th e uppe r an d lowe r limit s fo r th e term s o f trad e instea d o f determinin g th e exac t internationa l exchang e ratio . Th e neutralit y o f mone y an d model' s confinemen t t o a tw o commodit y cas e furthe r contaminat e th e system . Th e rea l variable s o f th e economi c syste m ar e determine d throughou t independentl y o f th e monetar y system . "Th e onl y functio n tha t mone y perform s i s t o se t th e absolut e pric e 1

7 levels." In a many commodity world the knowledge of real costs alone

1 Q I s insufficien t t o explai n import-expor t pattern . I n essence , th e comparativ e advantag e i s essentiall y a stati c concep t whic h Ignore s a variet y o f dynami c elements .

Countrie

s A an d B hav e comparativ e advantag e I n th e productio n o f commoditie s n an d m respectively . Countr y A wil l expor t an d Impor t n an d m an d wil l no t accep t les s tha n 1 uni t o f m (lowe r limit ) i n exchang e o f tw o unit s o f n . Similarl y countr y B wil l expor t m an d wil l no t giv e u p mor e tha n 3 unit s fo r eac h uni t o f n (uppe r limit ) i n exchang e fro m th e tradin g partner . I n a scal e fre e highl y productiv e (changed ) situatio n i n countr y A , th e facto r input-outpu t rati o stil l remain s th e sar:9 . Accordin g t o th e theor y i t ha s n o bearin g upo n th e limit s o r th e internationa l term s o f traxie . 1 7 Rober t H . Heller , Internationa l Trad e Theor y an d Empirica l

Eh/idenc

e ( Ne w Jersey : Prentic e Hal l Inc . I968 ) p.5 . Holll s B . Chenery , "Comparativ e Advantag e aji d Developmen t

Policy,

" i n Survey s o f Economi c Theory ; Growt h an d Development , Vol.Il l ( Ne w York : St . HartIn s Press , I969 ) . -18-

Empirica

l Evidence : Variou s statistica l estimate s o f elasticitie s o f deman d an d supplie s fo r individua l commoditie s trade d internationall y 1 9 hav e bee n made . However , thes e estimate s fal l shor t o f enhancin g th e understandin g o f th e Ricardia n theore m intende d t o explai n th e force s dictatin g th e trad e patterns . Th e primar y difficultie s encountere d i n estimatin g th e demand-suppl y elasticitie s ar e statistica l rathe r tha n economic .

Accordin

g t o th e Ricardia n theorem , "internationa l pric e difference s 2 0 ar e th e principa l immediat e caus e an d regulato r o f trade. " It suggest s that th e testabl e transformatio n o f th e theore m shoul d b e couche d eithe r i n term s o f labo r productivit y o r i n term s o f comparativ e uni t labo r costs . Countr y A wil l expor t m i f pA pA ra n [7] wher e p B p B m n A A P , P = prices of commodities "m" and "n" m n respectively in country A 1 9 H.S . Cheng , "Statistica l Estimate s o f Elasticitie s an d

Propensitie

s i n Internationa l Trade, " Internationa l Monetai y Fun d Staf f Papers , VI I (Apri l 1959)
. PP . IO7-I58 . 2 0 P.T . Ellsworth , " A Compariso n o f Internationa l Trad e Theories, "

America

n Economi c Review , Volum e XX X ( Jun e 19^0 ) p . 288
. P ^

Countr

y A wil l expor t "m " i f -r^ i s les s tha n 1 , an d countr y T, A P ^ ^ n ™ B will export "m" if -rr- is greater than 1. The exports'from country A P wil l tak e plac e i f P ^ / P ^ i s les s tha n P ^ / P ^ . ra ' m n ' n -19- B " R P ; P = prices of commodities "la" and "n" m n respectively in countiy B P ^ - g - = pric e rati o o f commodit y "m " m

Assumin

g tha t price s equa l cost s i t i s possibl e t o expres s price s i n term s o f componen t factors , W T G P = ( a ) -JL - X ^ [8 ] L W m m wher e a = inpu t outpu t ratio , labo r productivity , W = th e wag e bil l i n activit y "m " W m_ L ra w th e wag e rat e i n activit y "m " T G = tota l cos t i n activit y "m" . m ''

Sybstitutin

g a fo r P i n eq.uatio n 7 provide s th e followin g conditio n

A a m

B a m

A a n

B a n

•-[9 ] whic h i s th e Rlcardia n theore m i n term s o f labo r productivit y ratio . Th e formulatio n o f labo r productivit y thereo m i n relatio n t o relativ e wag e structure s o f tradin g partner s yield s th e followin g conditio n A A A A [10 ]

A a ja

B a m

A w m

B w m

A a n

B a n

A w . n

• B w n whic h i s th e Rlcardia n hypothesi s i n term s o f comparativ e uni t labo r costs . Bot h thes e hypothese s hav e bee n investigate d b y Bhagwat i usin g Stem' s data . - 20 Befor e turnin g t o Bhagwati' s estimate s i t migh t te usefu l t o discus s 2 2 2 3 2 4 th e notabl e studie s conducte d b y HacDougal , Stern , an d Balassa .

MacDouga

l ha s examine d th e America n an d Britis h export s o f simila r good s t o othe r mairket s which , i n fact , amount s t o investigatin g tha t th e

B a ra

A a m

an d m X ^ m -[11 ] labo r outpu t rati o an d export s rati o bea r positiv e correlation , wher e X indicate s exports . H e ha s use d 193
7 dat a fo r 2 5 industrie s an d 195
0 dat a fo r 3 9 industries . Ster n ha s closel y followe d MacDougal' s procedur e an d ha s employe d 195
0 data . Balass a ha s als o teste d th e abov e proposi tio n usin g 195
0 dat a fo r 2 8 industries . Th e result s o f thes e studie s ar e reproduce d i n tabl e 2 .

Despit

e impressiv e regressio n result s i n favo r o f th e Ricardia n hypothesis , thes e studie s hav e bee n attacke d fro m labo r pix>ductivit y front . Sinc e th e wag e rate s amon g countrie s diffe r mor e widel y tha n th e labo r productivities,consideratio n o f productivit y ratio s alon e i s In sufficien t t o explai n th e compositio n o f trade . Secondly , thes e studie s overloo k th e relationshi p betwee n labo r productivitie s an d pric e ratios .

Thirdly

, n o theoretica l justificatio n fo r th e increas e o f export s t o 2 2 G.D . MacDougal , "Britis h an d America n Exports : A Stud y Suggeste d b y th e Theor y o f Comparativ e Costs : Par t I, " Economi c Journal , Vol . LX I

September

, 1951
, pp.697-724 ; "Par t II, " Economi c Journal , Vol . LXI I

Septembe

r I962 , pp.487-521 . 2 3 R.M . Stern , "Britis h an d America n Productivit y an d Comparativ e Cos t i n Internationa l Trade, " Oxfor d Economi c Paper s , Vol.1 4 (Octobe r 62
) 2 4 Bel a Balassa , "A n Empirica l Demonstratio n o f th e Classica l

Comparativ

e Cos t Theo-ry, " Revie w o f Economic s an d Statistics,Vol.XL Y

August,1963

, pp.231-238 . Cxi I - t £- 1 O < M o r - i K & ^ CO o E H < O M M > < O ft ; M I C - P o c •H H 0) tH H 0 ) O O O O O C ^ • o 1 r-t \o o O • H - P n S D < (1) O •