Date:24/10/2004 URL: http://www.thehindubusinessline.com/bline/iw/2004/10/24/stories/2004102400681500.htm

Back What comparative advantage?

B. Venkatesh

IN A recent paper in Journal of Economic Perspectives, Prof Paul Samuelson has suggested that the US may be actually losing because of globalisation. This conclusion goes against one of the greatest theories in economic literature — Ricardo's theory of comparative advantage. What is this theory?

Suppose you typically take typically 3 days to design software. You also do carpentry as a hobby; it takes 10 days for you to make a decent teakwood showcase. Your friend also possesses similar skills. He can design software in six days and takes about 8 days to give some shape to the wood.

Notice that you are more skilled than your friend in both jobs. Yet, your friend is less efficient in carpentry than he is at designing software.

Now, assume that both of you decide to exchange goods. It is in your interest to design software. Why? You can make at least three software products instead of making one teakwood showcase.

Your friend is better off at carpentry. Why? It takes him twice the time you take to design the software. He will rather do the carpentry work and exchange that for the software. This is the principle of comparative advantage. It is essentially based on the principle of opportunity cost.

Extend this logic to one country dealing with another and you have the concept of globalisation. So powerful is the concept of comparative advantage that many economists have contributed related theories to the literature.

One such theory is the Hecksher-Ohlin model. This model states that a country will enjoy comparative advantage in a good when it has relatively more resources that can be used as inputs for creating that good.

Now, years after David Ricardo's theory and other allied principles, economists such as Paul Samuelson are calling to question the benefits of globalisation.