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Free Trade and Comparative Advantage. Nobel Prize for Professor Krugman

In a recent post and knol article I critically discussed the principles of the theory of evolution by natural selection, and of economy based on free trade and free markets, including Ricardo’s principle of comparative advantage. Now, Professor Krugman of Princeton University has received the Nobel prize for his insights into trade patterns between countries, showing that the principle of comparative advantage does not realistically explain trade patterns.

Below are excerpts from a New York Times article about him. Full article here.

“Traditional trade theory assumes that countries are different and will exchange only the kinds of goods that they are comparatively better at producing “…

This model, however, dating from David Ricardo’s writings of the early 19th century, was not reflected in the flow of goods and services that Mr. Krugman saw in the world around him. He set out to explain why worldwide trade was dominated by a few countries that were similar to one another, and why a country might import the same kinds of goods it exported.

Krugman saw that “many companies sell similar goods with slight variations. These companies become more efficient at producing their goods as they sell more, and so they grow. ”

He also examined the effects of transportation costs, explaining “under what conditions trade would lead people or companies to move to a particular region or to move away.”

Professor Krugman is also well known for his New York Times articles criticizing G.W.Bush’s policy and neoliberalism.

One Response to “Free Trade and Comparative Advantage. Nobel Prize for Professor Krugman”

  1. Marco Parigi Says:

    Traditional trade theory assumes that countries are different and will exchange only the kinds of goods that they are comparatively better at producing

    My view has always been that this assumption is only true *with all other things being equal*. Patterns of Trade (in contrast with what they would be – taking into account comparative advantage) in the real world as I see it is a product of the distortions of tariffs and subsidies on the one hand, and the geographic (distance to market), weight (cost/convenience of freight) and timing (when products are saleable compared to when they’re available) distortions on the other. This isn’t just obvious to me – Economists have to mathematically simplify the model somehow, otherwise it may be completely unwieldy. However, economists (including liberal ideologues) like to welcome new ideas and mathematics that can include things like these into the models. Obviously these things tend not to completely cancel each other out.

    In a lot of cases in the clothing industry (which I am in), I have noticed that states that are producing more at any one time have had a preceding tradition of subsidies/funding for an extended period beforehand. I still believe those subsidies to have been a complete waste of money. At least in Australia they don’t become entrenched, like they do in local pacific countries. I have no respect for governments that think that tariffs/subsidies on clothing actually helps their country under any circumstances.

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