Editing Comparative advantage (section)

==Empirical approach to comparative advantage==
Comparative advantage is a theory about the benefits that specialization and trade would bring, rather than a strict prediction about actual behavior. (In practice, governments restrict international trade for a variety of reasons; under [[Ulysses S. Grant]], the US postponed opening up to free trade until its industries were up to strength, following the example set earlier by Britain.<ref>{{Cite journal|last=Chang|first=Ha-Joon|author-link=Ha-Joon Chang|date=December 2003|title=Kicking Away the Ladder: The "Real" History of Free Trade|journal=FPIF Special Report}}</ref>) Nonetheless there is a large amount of [[empirical evidence|empirical]] work testing the predictions of comparative advantage. The empirical works usually involve testing predictions of a particular model. For example, the Ricardian model predicts that technological differences in countries result in differences in labor productivity. The differences in labor productivity in turn determine the comparative advantages across different countries. Testing the Ricardian model for instance involves looking at the relationship between relative labor productivity and international trade patterns. A country that is relatively efficient in producing shoes tends to export shoes.

===Direct test: natural experiment of Japan===
Assessing the validity of comparative advantage on a global scale with the examples of contemporary economies is analytically challenging because of the multiple factors driving globalization: indeed, investment, migration, and technological change play a role in addition to trade. Even if we could isolate the workings of open trade from other processes, establishing its causal impact also remains complicated: it would require a comparison with a counterfactual world without open trade. Considering the durability of different aspects of globalization, it is hard to assess the sole impact of open trade on a particular economy.{{Cn|date=August 2021}}

[[Daniel Bernhofen]] and John Brown have attempted to address this issue, by using a natural experiment of a sudden transition to open trade in a market economy. They focus on the case of Japan.{{sfn|Bernhofen|Brown|2004|pages=48–67}}{{sfn|Bernhofen|Brown|2005b|pages=208–225}} The Japanese economy indeed developed over several centuries under autarky and a quasi-isolation from international trade but was, by the mid-19th century, a sophisticated market economy with a population of 30 million. Under Western military pressure, Japan opened its economy to foreign trade through a series of [[unequal treaties]].{{Cn|date=August 2021}}

In 1859, the treaties limited tariffs to 5% and opened trade to Westerners. Considering that the transition from autarky, or self-sufficiency, to open trade was brutal, few changes to the fundamentals of the economy occurred in the first 20 years of trade. The general law of comparative advantage theorizes that an economy should, on average, export goods with low self-sufficiency prices and import goods with high self-sufficiency prices. Bernhofen and Brown found that by 1869, the price of Japan's main export, silk and derivatives, saw a 100% increase in real terms, while the prices of numerous imported goods declined of 30-75%. In the next decade, the ratio of imports to gross domestic product reached 4%.{{sfn|Bernhofen|Brown|2016|pages=54–90}}

===Structural estimation===
Another important way of demonstrating the validity of comparative advantage has consisted in 'structural estimation' approaches. These approaches have built on the Ricardian formulation of two goods for two countries and subsequent models with many goods or many countries. The aim has been to reach a formulation accounting for both multiple goods and multiple countries, in order to reflect real-world conditions more accurately. [[Jonathan Eaton]] and [[Samuel Kortum]] underlined that a convincing model needed to incorporate the idea of a 'continuum of goods' developed by Dornbusch et al. for both goods and countries. They were able to do so by allowing for an arbitrary (integer) number {{var|i}} of countries, and dealing exclusively with unit labor requirements for each good (one for each point on the unit interval) in each country (of which there are {{var|i}}).<ref>{{cite journal|last1=Eaton|first1=Jonathan|author1-link=Jonathan Eaton|last2=Kortum|first2=Samuel|author2-link=Samuel Kortum|title=Putting Ricardo to Work|journal=[[Journal of Economic Perspectives]]|date=Spring 2012|volume=26|issue=2|pages=65–90|doi=10.1257/jep.26.2.65|url=http://www.aeaweb.org/jep/app/2602_Eaton_Kortum_app.pdf}}</ref>

===Earlier empirical work===
Two of the first tests of comparative advantage were by MacDougall (1951, 1952).<ref>{{multiref2|1={{cite journal|last=MacDougall|first=G. D. A.|author-link=Donald MacDougall| title=British and American exports: A study suggested by the theory of comparative costs. Part I| journal=[[The Economic Journal]]| year=1951| volume=61 | issue=244|pages=697–724|doi=10.2307/2226976 |jstor=2226976 |ref=none}}|2={{cite news|last=MacDougall|first=G. D. A.|author-mask=1|title=[..] Part II|journal=The Economic Journal| year=1952| volume=62 | issue=247|pages=487–521|ref=none}}}}</ref> A prediction of a two-country Ricardian comparative advantage model is that countries will export goods where output per worker (i.e. productivity) is higher. That is, we expect a positive relationship between output per worker and the number of exports. MacDougall tested this relationship with data from the US and UK, and did indeed find a positive relationship. The statistical test of this positive relationship was replicated with new data by Stern (1962)<ref>{{cite journal|last=Stern|first=Robert M.|title=British and American productivity and comparative costs in international trade|journal=[[Oxford Economic Papers]]|year=1962|volume=14 |issue=3 |pages=275–296|doi=10.1093/oxfordjournals.oep.a040903 }}</ref> and [[Béla Balassa|Balassa]] (1963).<ref>{{cite journal|last=Balassa|first=Béla|author-link=Béla Balassa| title=An empirical demonstration of classical comparative cost theory| journal=[[The Review of Economics and Statistics]]|year=1963 |pages=231–238|doi=10.2307/1923892 |jstor=1923892 }}</ref>

Dosi et al. (1988)<ref>{{cite book|last1=Dosi|first1=Giovanni|author-link=Giovanni Dosi|last2=Pavitt|first2=Keith|author2-link=Keith Pavitt|last3=Soete|first3=Luc|author3-link=Luc Soete|title=The Economics of Technical Change and International Trade | year=1990 |publisher=Harvester Wheatsheaf|isbn= 978-0745000329}}</ref> conducted a book-length empirical examination that suggests that international trade in manufactured goods is largely driven by differences in national technological competencies.

One critique of the textbook model of comparative advantage is that there are only two goods. The results of the model are robust to this assumption.<ref name="Dornbusch1977" /> generalized the theory to allow for such a large number of goods as to form a smooth continuum. Based in part on these generalizations of the model,<ref>{{cite journal | last=Davis|first=Donald R.|author-link=Donald R. Davis (economist)| title=Intraindustry Trade: A Heckscher-Ohlin-Ricardo Approach | journal=[[Journal of International Economics]]| volume=39 | year=1995 | issue=3–4 | pages=201–226 | doi=10.1016/0022-1996(95)01383-3| citeseerx=10.1.1.557.8401 }}</ref> provides a more recent view of the Ricardian approach to explain trade between countries with similar resources.

More recently, Golub and Hsieh (2000)<ref>{{cite news |author1=Golub, S. |author2=C-T Hsieh | title=Classical Ricardian Theory of Comparative Advantage Revisited | journal=Review of International Economics | volume=8 | issue=2 | year=2000 | pages=221–234 }}</ref> presents modern statistical analysis of the relationship between relative productivity and trade patterns, which finds reasonably strong correlations, and Nunn (2007)<ref>{{cite journal|last=Nunn|first=Nathan|author-link=Nathan Nunn|title=Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade|doi=10.1162/qjec.122.2.569|journal=[[The Quarterly Journal of Economics]]| volume=122 | issue=2 | year=2007 |pages=569–600|url=https://scholar.harvard.edu/files/nunn/files/contracts_trade_qje.pdf|access-date=31 March 2025}}</ref> finds that countries that have greater enforcement of contracts specialize in goods that require relationship-specific investments.

Taking a broader perspective, there has been work about the benefits of international trade. Zimring & Etkes (2014)<ref>{{cite journal|last1=Zimring|first1=Assaf|last2=Etkes|first2=Haggay|date=January 2015|title=When Trade Stops: Lessons from the 2007–2010 Gaza Blockade|journal=[[Journal of International Economics]]|volume=95|issue=1|pages=16–27|doi=10.1016/j.jinteco.2014.10.005}}</ref> find that the [[blockade of the Gaza Strip]], which substantially restricted the availability of imports to Gaza, saw labor productivity fall by 20% in three years. [[James Markusen|Markusen]] et al. (1994)<ref>{{cite book|last1=Markusen|first1=James R.|author1-link=James Markusen|last2=Melvin|first2=James R.|last3=Kaempfer|first3=William H.|last4=Maskus|first4=Keith E.|year=1994 |title=International Trade: Theory and Evidence |url=http://www.colorado.edu/Economics/courses/Markusen/textbook/mmkm3.pdf |access-date=2014-08-13 |page=218 |publisher=McGraw-Hill |isbn=978-0070404472 |archive-url=https://web.archive.org/web/20150131180218/http://www.colorado.edu/Economics/courses/Markusen/textbook/mmkm3.pdf |archive-date=2015-01-31 |url-status=dead }}</ref> reports the effects of moving away from [[autarky]] to [[free trade]] during the [[Meiji Restoration]], with the result that national income increased by up to 65% in 15 years.
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===Criticism===
Several arguments have been advanced against using comparative advantage as a justification for advocating free trade, and they have gained an audience among economists. [[James Brander]] and [[Barbara J. Spencer]] demonstrated how, in a strategic setting where a few firms compete for the world market, export subsidies and import restrictions can keep foreign firms from competing with national firms, increasing welfare in the country implementing these so-called strategic trade policies.<ref>{{cite news |last=Krugman |first=Paul R.|author-link=Paul Krugman|title=Is Free Trade Passe? |journal=[[Journal of Economic Perspectives]] |year=1987 |volume=1 |issue=2 |pages=131–144}}</ref>

There are some economists who dispute the claims of the benefit of comparative advantage. [[James K. Galbraith]] has stated that "free trade has attained the status of a god" and that "{{nbsp}}... none of the world's most successful trading regions, including Japan, Korea, Taiwan, and now mainland China, reached their current status by adopting [[neoliberal]] trading rules." He argues that comparative advantage relies on the assumption of [[constant returns]], which he states is not generally the case.{{sfn|Galbraith|2008|pp=68–69}} According to Galbraith, nations trapped into specializing in agriculture are condemned to perpetual poverty, as agriculture is dependent on land, a finite non-increasing natural resource.{{sfn|Galbraith|2008|page=[https://archive.org/details/predatorstatehow00galb/page/70 70]}}

==== 21st century ====
In the 21st century, Ricardo's comparative advantage theory has faced new challenges due to the development of [[global value chain]]s. Unlike Ricardo's model of trade between anonymous parties with equal bargaining power, modern global value chains operate between connected firms with unequal power, with nations specializing in particular production stages rather than complete goods.<ref>{{Cite web |last=Selwyn |first=Benjamin |last2=Leyden |first2=Dara |date=22 April 2021|title=Understanding Development in a Global Value Chain World: Comparative Advantage or Monopoly Capital Theory |url=https://developingeconomics.org/2021/04/22/understanding-development-in-a-global-value-chain-world-comparative-advantage-or-monopoly-capital-theory/|access-date=13 April 2025|website=Developing Economics}}</ref>

The COVID-19 pandemic further challenged the theory when disruptions to globally distributed supply chains prompted nations to reconsider their reliance on foreign production, particularly for critical goods like medical equipment and pharmaceuticals.<ref>[[Joseph Stiglitz|Stiglitz, Joseph]]. (October 2020) [https://business.columbia.edu/sites/default/files-efs/imce-uploads/Joseph_Stiglitz/feps%20covid%20paper%2010%20stiglitz.pdf "Recovering from the Pandemic: An Appraisal of Lessons Learned"]. FEPS COVID Response Papers No. 10, [[Foundation for European Progressive Studies]]. Retrieved April 11, 2025.</ref> In response, some countries have begun reinforcing supplier relationships or diversifying trade networks to mitigate future disruptions.<ref>Baschuk, Bryce. (12 January 2023). [https://www.bloomberg.com/news/newsletters/2023-01-12/supply-chain-latest-trade-self-sufficiency-is-hard-mckinsey-says "McKinsey explores hurdles nations face to reach trade self-reliance"]. [[Bloomberg News]]. Retrieved April 11, 2025.</ref>