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Capital mobility and absolute advantages in international trade theory
Enrico Bellino

Last modified: 2019-06-14

Abstract


The theory of international trade has been shaped on the notion of comparative costs (or of comparative advantages) since the times of Ricardo. According to this principle, when two countries open to trade, for the system as a whole there will always be the convenience that each country specializes in the production of at least one good: that (or those) good where it has an advantage comparatively to the other country. As Ricardo’s example showed, a situation where one country has an advantage in the production of all goods, i.e. a situation where the country has an absolute advantage, is not relevant in determining the international allocation of production. The reason was that Ricardo explicitly excluded the possibility that capital could move between countries. This assumption reflects the historical and institutional environment where he developed his analysis. But when this assumption is relaxed and we allow for capital mobility, it is reasonable to expect that if one country has an absolute advantage then all productions tend to concentrate in that country only. This possibility has been investigated in formal terms within the modern classical approach. The pioneering work was presented by Antony Brewer (1985) in a model where goods were produced by labour only, and capital was constituted just by advanced wages. More recently Sergio Parrinello (2010) presented a framework where one consumption good is produced by labour and one capital good. After a brief review of these works a generalization to the case with any number of commodities is proposed in this paper.

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