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- 1 The comparative advantage example is flawed.
- 2 John Stuart Mill’s contributions to the theory?
- 3 What about the marginal cost?
- 4 Possible flaw in the Trade Costs article
- 5 Comparative Advantage is not a law
- 6 Criticism?
- 7 Scrap This Article. It is Wrong, Mumble Failing to Correct the Popular Misconception.
- 8 "Ricardo-Viner" wikilink
The comparative advantage example is flawed.
The comparative advantage example at the start of this article is flawed. It states the less productive country is making more shirts per hour 4 instead of 2), which allows the flawed reasoning that this less productive country can benefit by making more shirts and selling them to the more productive country.
It is possible this example can be replaced with a different example which is sound.
- Thanks! I just modified the numbers. You can edit the article yourself, of course, if it's still wrong or you see another way of improving it. —Ben Kovitz (talk) 01:52, 20 June 2011 (UTC)
John Stuart Mill’s contributions to the theory?
Nice summary. (Torrrens — now there’s a name that doesn’t crop up often!)
I was surprised not to see any mention of John Stuart Mill’s extensions and refinements of Ricardo’s theory. Mark Blaug’s (classic) Economic Theory in Retrospect (4th ed.) devotes 4 pages to Mill’s development of “reciprocal demand” and “terms of trade” (pp. 204–208; the 1st is an important new theoretical tool, the 2nd a key result), complete with 2 offer curve diagrams! (Unfortunately, as is often the case in Blaug, it’s not clear whether Mill actually used the graphical device of an offer curve himself, or whether Mill only described the concept and Blaug incorporated the graphical device. I doubt that Mill did draw anything like an offer curve himself — graphical analysis hadn’t yet become a significant part of those early pioneers’ tool kit.)
Blaug also credits Mill with explicitly introducing transportation costs and how they affect the “ratios of exchange”.
According to Blaug, Mill used “German linen” and “English cloth” as his 2 illustrative commodities. That seems like an odd choice: 2 very similar commodities, vs. Ricardo’s classic English cloth vs. Portuguese wine. But Blaug doesn’t explain why Mill did this; maybe Mill didn’t explain it, either. (Pure speculation on my part: Mill may have wanted to illustrate that comparative advantage could even apply to specific commodities within broader categories of such commodities, and not just to significantly different products like cloth and wine.)
What about the marginal cost?
Dear Wikipedia contributors,
I respectfully greet you. I noticed that the definition of comparative advantage includes a relationship with both opportunity and marginal cost. The example clearly links it with opportunity cost. On the other hand, the link with marginal cost is not so evident. Could you add more information about the latter relationship? Thanks in advance.
Possible flaw in the Trade Costs article
Great article, thanks to all involved. I am confused by the follow, and thought it might be incorrect:
" it then costs Britain 115 units of labor to obtain wine by trade – 100 units for producing the cloth, 15 units for importing the wine, which is more expensive than producing the wine locally,"
Doesn't the little chart preceding indicate Britain's wine Cost at 120? It seems that even the higher trade costs of 15 still allow for some advantage to Britain in trade, although I agree that trade stops, because Portugal now has no advantage (cloth by trade for wine now costs 80+15 which is greater than the 90 to produce locally). — Preceding unsigned comment added by 220.127.116.11 (talk) 13:20, 21 January 2013 (UTC)
Comparative Advantage is not a law
I have removed the statement suggesting, actually stating that "comparative advantage" is a law, which it is not nor has ever been. It has apparently been widely replaced by several sources (all it appears identified by anonymous IP addresses) in various articles and comment referrals throughout Wikipedia with the phrase, "law of comparative advantage", which makes it both original research and quite wrong... I have changed it accordingly. Stevenmitchell (talk) 08:36, 11 March 2013 (UTC)
This is silly. It's a law in exactly the same sense that 2+2=4 is a law. The fact that some people, including the author of the article, don't understand it does not mean that there's any doubt about it.
Given that competitive advantage has been part of the justification of free trade and given that there is a broad concensus in favor of free trade despite the fact that there has never been a country in history larger than about Delaware that became first world on the basis of free trade though plenty have tried, I would say that removing "Law" is probably a healthy response, to say the least.18.104.22.168 (talk) 00:27, 20 February 2015 (UTC)
The article needs to feature more criticism. There has been much criticism of the concept by scholars over the years and it is a shame that the article fails to mention any of it. One excellent treatment of the topic is featured in "Trade, Development and Foreign Debt" by Michael Hudson Vilhelmo (talk) 06:37, 28 April 2013 (UTC)
The criticism should be based in top scholarly research, and I feel that the mentioning of Ha-Joon Chang does not satisfy this criterion. — Preceding unsigned comment added by 22.214.171.124 (talk) 13:36, 18 January 2014 (UTC)
- Ha-Joon Chang has published several books that are reliable sources. Your feelings are not wikipedia policy. Furthermore, the first statement of the article today is wrong. Comparative advantage is both a descriptive theory - for explaining the patterns of trade - and a normative theory. The article might mention the Leontief paradox - I have not read it closely - and more recent work validating it. Leontief showed that a naive theory of comparative advantage is empirically wrong. Alternative theories for explaining the patterns international trade include the Keynesian theories of Joan Robinson and Harry Johnson - they would have been irritated to be grouped together like that, maybe - and Krugman's work on increasing returns. As for normative claims, Ian Steedman and others showed decades ago that economies have negative gains - that is, losses - from trade when specializing under the theory of comparative advantage, given constant returns, etc.; produced capital goods, and a positive interest research. Others have built on this work in reliable sources since then too. 126.96.36.199 (talk) 22:55, 13 August 2014 (UTC)
- The concept of comparative advantage is completely descriptive, but confusion is inevitable. The conclusions of descriptive economics are, immediately relevant to important normative problems, to questions of what ought to be done and how any given goal can be attained.
- The Leontief Paradox is a paradox concerning the Heckscher–Ohlin theorem and should be incorporated there.
- Ha-Joon Chang actually agrees with the concept of comparative advantage. He says: Comparative advantage does offer a useful guideline in telling us how much the country is sacrificing by protecting its infant industries. The more you deviate from your comparative advantage, the more you pay in order to acquire capabilities in new industries.. His book is about trade policy and makes normative claims. He could make a fine addition to articles like Protectionism, Import substitution or Dependency theory.
- Krugman never criticizes the concept of comparative advantage. He is one it's strongest supporters. See for example here: http://web.mit.edu/krugman/www/ricardo.htm
"Furthermore, the first statement of the article today is wrong. Comparative advantage is both a descriptive theory - for explaining the patterns of trade - and a normative theory." I do not wish to be rude here, but this is nonsense. Most everything you state in these two sentences is patently false. Firstly, comparative advantage is not a descriptive theory explaining the patterns of trade. It is a principle explaining the consequences of non-equivalent opportunity costs. With non-equivalent opportunity costs, cooperation can reduce the costs of production or, equivalently, produce more at an equivalent cost. That's it. This principle is true in autarchical Iceland in 742 and in Singapore in 2014. It will be true on Mars in 2050, even if there is nobody there; i.e. it is true regardless of the trade policies adopted by countries. Now it just so happens that countries do, sometimes — particularly Western countries in the past two centuries or so — adopt policies that replicate the predictions of comparative advantage, and some of this evidence is now outlined in the article. Please let me repeat: the principle of comparative advantage would still be true if all countries shut down borders today. It is not a theory to explain the patterns of trade.
Secondly, comparative advantage is not normative. There is no welfare function. There is no mention of Paretian weights. There is as much normative content in the Triangle Inequality as there is in comparative advantage. If you want the shortest distance, go in a straight line. If you want to maximize output at lowest total cost, cooperate and trade. That does not imply you should take the shortest distance, or wish to maximize output.
There are many valid reasons why countries would not want to maximize output. For example, I would not like the United States to focus on comparative advantages with ISIS and trade weapons for textiles. For geopolitical reasons, I would support increased trade restrictions on Russia. For reasons of financial decoupling, I can see reasons why countries may want trade at arms' length. (Conversely, for reasons of financial integration, I can see reasons why e.g. the EU may want to maximize trade, regardless of cost.)
First of all, there are two separate proposals put forth under the heading comparative advantage. 1) That you can achieve a better short term result by buying from a producer who's selling price is cheaper than your labor cost, and 2) That you can build up your economy faster by always going with the instantaneous lowest cost for your needs. 1) is almost a tautology, but a lot of people seem to use the Law of comparative advantage to imply that 2) is true, which requires both theoretical and historic support. Who cares if current theory says the optimal level of tariffs is zero if every single first world country in history has had non-zero tariffs while becoming first world and lots of countries have tried zero tariffs and remained third world?
At some point you have to say that theoretical hypothesis are useless if they prove that the sky is red. "Several arguments have been advanced against using comparative advantage as a justification for advocating free trade, and they have gained an audience among economists." is appropriately written in that it accepts the truth of comparative advantage while cautioning that it can't be extended to principles of free trade as industrial policy. Whether I am better off going across the street to buy a sandwich or making my own is irrelevant to the question of whether I should build and open a sandwich shop, as South Korea and Japan understood so well in the middle of the 1900s when they turned their backs on the principles of free trade to start building Kias, Samsung products, Toyotas, Hondas, and Sony products. For plenty of excellent criticism of using comparative advantage to support free trade from a historical support, see Free Trade doesn't work by Ian Fletcher.188.8.131.52 (talk) 23:16, 19 February 2015 (UTC)
This article definitely needs more criticism. It seems a little biased to highlight all of the positives of comparative advantage or all of the opinions on it that aren't necessarily negative. In this heading, it might be important to highlight some of the stipulations that accompany influential factors on comparative advantage (such as wealth being a determinant of comparative advantage, for example) Franrichburg (talk) 16:43, 16 March 2015 (UTC)
Scrap This Article. It is Wrong, Mumble Failing to Correct the Popular Misconception.
The first sentence of this article, "In economics, comparative advantage refers to the ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another" is incorrect. That is exactly what comparative advantage does not refer to. This is advantage, not comparative advantage, and of course all products have different marginal or opportunity costs.
The confusion of the two, advantage and comparative advantage, is the reason why the doctrine of comparative advantage is said to be the only thing in classical economics which is not intuitively obvious. The writer is perhaps confused by thinking about two goods, but the minimal model involves two producers of those goods, two payment regimes with different currencies, and the terms of trade between those producers.
For a moment the second sentence staggers in the right direction. The author does not seem to realize that the second sentence does not amplify the first, it propounds a different idea.
The second paragraph, explicating the second sentence, is hand-waving more or less in the right direction. It is meaningless without the point that the "two nations" sensibly referred to must have different currencies with which to equilibrate their own payments of their own shirt and shoe makers.
Here's what's important: the word "comparative" is not in there just for fun; the essence is not being better at something, but being more better or less worse at making A than B. You sell A, even to somebody who can make easier than you, and you buy B, because they are more better or less worse at B.
Michael Jordan plays better basketball than pretty much anybody, but he would also be better than almost anybody else at mowing lawns; nevertheless he pays other people to mow his lawn. Comparative advantage: basketball. I have a comparative advantage over Michael Jordan in mowing his lawn over playing basketball anywhere any time. Two actors, me and Jordan; two products, lawn mowing and professional basketball.
Then the next section, "Origins of the Theory," veers back into error. It confuses an accurate statement by Smith, about advantage, with the actual doctrine of comparative advantage, formulated by, and generally credited to, David Ricardo. The first is not an instance of the second. They are different things.
This article should be scrapped. The whole thing should be started over from scratch. As it stands the article is just wrong. It propagates a commonly held misconception, and thus increases the sum of human ignorance. David Lloyd-Jones (talk) 00:46, 4 August 2014 (UTC)
Agreed, the opening of this article is extremely misleading about the nature of comparative advantage, and then goes on to contradict it's own opening definition. Comparative advantage is first and foremost an internal comparison by an agent about what they can produce most efficiently, not a comparison between between agents other than in the sense of measuring the overall market value of a commodity. Also, the offending line in the definition noted above cites a BLS definition that has no similarity to the definition in the article. — Preceding unsigned comment added by 184.108.40.206 (talk) 15:15, 26 October 2014 (UTC)
I've undone piped link for "Ricardo-Viner" per WP:SPECIFICLINK. "Ricardo-Viner" is red linked which indicates to other editors that no Wikipedia article currently exist for this topic. It is possible that another editor will see this and decide to create such an article. In that case, all they have to do is click on the red link and it will take them to a where they can start working on the article. However, if the piped link is changed to "Specific Factors Model", clicking on the red link will take you to a page to create that article instead. Such a change is not an improvement and not a very intuitive use of pipe links as explained in WP:EASTEREGG. If the purpose of this edit was to create a red link for "specific factors", then this should have been done by "[[Specific Factors Model|specific factors]]" instead which would give "specific factors". - Marchjuly (talk) 13:26, 18 August 2014 (UTC)which changed the
- Wealth as a Determinant of Comparative Advantage José Wynne The American Economic Review Vol. 95, No. 1 (Mar., 2005) , pp. 226-254 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/4132678