RICARDO'S DIFFICULT IDEA

written by Paul Krugman

presented by
RICARDO'S DIFFICULT IDEA

Synopsis:
The trendy idea of rejecting Comparative Advantage
is rejecting a tried and true idea that has lifted
millions out of poverty.
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Comparative Advantage:
Krugman explains about the idea of comparative advantage
with its implication that trade between two nations normally
raises the real incomes of both.

More specifically, Comparative advantage suggests that trade

between two countries can make both nations wealthier.
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Krugman gives some reasons why certain economic intellectuals and non-
economists reject comparative advantage. It is described in 3 levels :

1. Shallowest level, some intellectuals reject comparative advantage simply

out of a desire to be intellectually fashionable. Free trade, they are aware, has
some sort of iconic status among economists. More concisely, people try to
follow the trends of intellectuals who mostly reject the idea of comparative
advantage.

2. Deeper level, the Comparative Advantage is more difficult than it seems,

because it is part of a network of ideas which constitute a mathematical
model. Thus, comparative advantage is a harder concept than conventional
wisdom.

3. Deepest level, Most intellectuals are against the idea of interpreting world
applying a mathematical model.
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• According to Krugman’s article, it is found that several economists and

non-economists are against comparative advantage.

• It is not necessarily because they think it is untrue, but rather, because

they don't understand the complete phenomenon.

• Krugman argues that people who don't understand certain economic

principles disagree with comparative advantage.

• This misunderstanding of comparative advantage causes many

intellectuals to refuse to talk about comparative advantage.
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• Ricardo's idea mainly talks about specialization and comparative

advantage which suggest that each nation should specialize in the
activities in which it excels and abandon those relative inefficient
industries.

• International trade would grow if the nation exports their surpluses

from production and import the products they no longer produce so that
efficiency and productivity could be increased.

• Those people who think that increase in productivity would lead to

wage decrease are wrong.

• The actual situation is that there is a general increase in wage of

workers and compensation
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The author claimed that comparative advantage is an easy concept for

economists but a fairly difficult idea for non-economists. There are 3
implicit assumptions that underlie Ricardian's model.

1. Wages are determined in a national

• To some intellectuals, there is no such thing as  a national labor market.

Workers can earn more by moving into the industries in which there is a
comparative advantage.

• The link between productivity and wages is misunderstood. Non-

economists think that wages reflect productivity of individual company.
The amount of increase in productivity should be passed on to increase
in wages in employees.

• Wages are not endogenous to non-economists. The amount of wages

workers receive do not correspond to their level of productivity.
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2. Constant employment is a reasonable approximation

• International trade is a long-run issue, economy has a self-serving

tendency to return to full employment.
• Also, federal reserve is acting in the background holding employment
constant.

3. Trade imbalances are also self-correcting

• A country will run persistent deficit if it is an attractive site for foreign

investment
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Conclusion:

Krugman also states that Ricardo's idea is truly, madly, deeply

difficult. But it is also utterly true, immensely sophisticated - and
extremely relevant to the modern world. Hence,…..

 We need to understand that even renowned economists may be lacking in

the understanding of simple economic principles.

 We need to support old or accepted economic ideas because even though

they have been around for while, they are accurate in many instances.

 We must explain our economic reasoning and cannot assume people

understand our economic ideas and modeling although they are learned in
the economic field.
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