312
COMPARATIVE
IN CONTEXT
FOCUS
Global economy
KEY THINKER
Paul Krugman (1953– )
BEFORE
1817 David Ricardo says
that countries have
comparative advantages
due to physical factors.
1920s and 1930s Eli
Heckscher and Bertil Ohlin
argue that capital-abundant
countries export capital-
intensive goods.
1953 Wassily Leontief finds
an empirical paradox: the US,
a capital-abundant country,
has relatively labor-intensive
exports, in violation of existing
trade theories.
AFTER
1994 Gene Grossman and
Elhanan Helpman analyze
the politics of trade policy,
examining the effect
of lobbying on the level of
protection given to firms.
ADVANTAGE IS
AN ACCIDENT
TRADE AND GEOGRAPHY
E
conomists used to believe
that nations traded with
each other because they
were different: tropical countries
sold sugar to temperate countries,
temperate ones exported wool.
Regions that for historical
Some countries were better at
producing certain things—they
reason have a head start as
had a “comparative advantage”
centers of production will
because of their weather or soil. attract even more producers.
However, there is good reason Paul Krugman
to believe that this is not the whole
story. In 1895, Catherine Evans
from Dalton, Georgia, was visiting
a friend and noticed a homemade
bedspread. Inspired, she made a
similar one and began to teach
others. Soon, textile firms sprung industry arising from a chance
up, creating a carpet industry that event in Georgia. He observed that
came to dominate the market. This a lot of trade goes on between
contradicted the usual explanation similar economies. Production has
of international trade, since economies of scale: the initial outlay
Georgia has no comparative for a car plant means that costs are
advantage for making carpet. lower the more cars are made. Either
country could make cars, but once
Quirk of history one starts, it builds up a cost
In 1979, US economist Paul advantage that is hard for the other
Krugman proposed a new theory to erode. So a region may end up
that allowed for the influence of dominating trade in a good due
accidents of history, such as an purely to quirks of history. ■
See also: Protectionism and trade 34–35 ■ Comparative advantage 80–85 ■
Economies of scale 132 ■ Market integration 226–31