Week 4: Where Does Comparative Advantage Come From?

Transcription

1 Wk 4: Whr Dos Coparativ Advantag Co Fro? In Wk 3, w larnd that a country xports goods in which it has a coparativ advantag and iports goods in which it has a coparativ disadvantag. This bgs th qustion o what dtrins a country s coparativ advantag and disadvantag. This not addrsss this qustion. Coparativ Advantag is not a Fixd roprty First o all, it should b notd that a country s coparativ advantag is not a ixd proprty. On th contrary, goods in which a country has a coparativ advantag chang ovr ti, with attndant changs in its trad structur. Figur 1. Coodity coposition o Japans trad: Food Export Txtil & apparl Chical & tal products Machinry Othr products 0% 20% 40% 60% 80% 100% Iport Food & raw atrials Crud & proccssd nrgy products Txtil & apparl Chical & tal products Machinry Othr products 0% 20% 40% 60% 80% 100% (Sourc) Yaazawa & Yaaoto (1979) and Ministry o Financ, Trad Statistics o Japan. 1

2 Figur 1 illustrats how Japan s trad structur has changd ovr th past 140 yars. In th id-1850s, Japan trinatd its isolationist policy and startd trading activly with wstrn countris. Japan s ajor xport goods in th lat Edo and arly Miji priods wr ood and raw txtil atrials such as silk yarn. Alost vrything ls was uncoptitiv in wstrn countris or not producd at all. This situation did not last long, howvr. Japan s balanc o trad in ood and raw atrials quickly turnd ro positiv to ngativ whil light anuacturs, such as cotton cloths, porclain and glasswar, rgd as nw xport goods. Although ths products raind ajor orign-xchang arnrs until th arly post- World War II ra, xports o achinry, such as autoobils, startd to grow rapidly in th 1960s. Whil achinry accounts or th ajority o Japan s xports vn today, th shar o achinry in its iports has also risn rcntly, thanks in part to a surg in iports o IT quipnt and othr lctronic products ro othr Asian countris. According to Figur 1, it ss that Japan s coparativ advantag has shitd ro agricultur to light anuacturs and ro light anuacturs to achinry during th past 140 yars. Now th qustion is what brought about ths changs. Who is Copting with Who? Obviously, tchnology is an iportant actor bhind coparativ advantag. As th tchnology o a ir or an industry progrsss, so dos its productivity, aking that ir or industry or coptitiv in th world arkt. As w will discuss blow, howvr, th thory o coparativ advantag suggsts that th natur o coptition acing individual irs is not ncssarily what th anagrs o ths copanis hav in ind. In Wk 3, w considrd a situation in which th ollowing rlationship holds or autarky prics in Japan and th USA: (1). In th abov inquality, and rprsnt th yn prics o ood and achinry in Japan whil and ar th dollar prics o ths goods in th USA. According to (1), th USA has a coparativ advantag in ood production and Japan has a coparativ advantag in achinry production. (1) is quivalnt to (synonyous with) th ollowing inquality rlation, (2) which copars th rlativ pric o ood in Japan and th USA with that o achinry in th two countris. In Wk 3, w also ound that th yn/dollar xchang rat ust satisy a crtain condition or ach country to xport on good and iport th othr good. Th ood prics in th two countris ar qualizd whn = in which stands or th xchang rat dind as th pric o on dollar in yn. Lt us writ th valu o th xchang rat that satisis this condition as, that is, (3). Whn th actual xchang rat riss abov (so that on dollar costs or than yn), Japans ood bcos chapr than Arican ood and xportd to th USA. Whn it alls blow S, Arican ood bcos chapr than Japans ood and xportd to Japan. W can siilarly din th xchang rat at which th pric o achinry is qualizd btwn th two countris as 2

3 Using th xprssions in quations (3) and (4), w can rwrit (2) as (4)., (5) which tlls us th rang o valus that th yn/dollar xchang rat is likly to tak. I th actual xchang rat is highr than, both ood and achinry ar xportd by Japan; i th xchang rat is lowr than, both goods ar xportd by th USA. As discussd in th Wk 3 not, howvr, ths situations ar abnoral and will b corrctd soonr or latr by dand-supply dynaics in th orign xchang arkt. In th long run, th xchang rat is xpctd to sttl at a valu btwn and, at which ood is xportd by th USA but achinry is xportd by Japan. As long as (5) holds, at no xchang rat is thr a situation in which Japan xports ood and th USA xports achinry. But what i Japans arrs or ood anuacturs ar unhappy about this situation and want to b an xportr? Th only thing that thy can do by thslvs is to iprov thir own productivity and rduc th prics o thir products. I alls suicintly, (2) and (5) chang to and (6), in which cas Japan xports ood and iports achinry. (7) As w saw in Figur 1, Japan did xport a lot o ood during th 19 th cntury but barly dos so today. It should b notd, howvr, that this is not ncssarily bcaus Japans arrs and ood anuacturrs hav raind idl and hav not ad ort to iprov thir productivity. 1 Which o (2) and (6) holds in practic dpnds not only on th Japans ood pric, but also on th othr thr prics. Evn i Japans arrs cut thir prics, thy ay rain unabl to xport i, or xapl, Japans achinry irs succd in cutting thir prics by a largr proportion. This iplis that Japans arrs ar copting not only with Arican arrs but also with Japans (and Arican) achinry anuacturrs, whos action ay hav a largr ipact on whthr thy nd up bing xportrs or iportrs. Coparativ Advantag and Factor roportions Tchnology is not th only dtrinant o prics. Th pric o a good rlcts not only th cost o raw atrials and intrdiat inputs but also that o labor and othr production rsourcs. In conoics, rsourcs that ar usd or th production o a good, but do not physically bco part o th inal product, ar calld actors o production. Exapls o actors o production ar land, physical capital (buildings and quipnt) and labor. Labor includs unskilld workrs and skilld workrs o which th lattr bodis spciic skills and knowldg that ar usul or advancd tasks. Factors o production hav two iportant proprtis that ar rlvant to coparativ advantag. First, th stocks (aounts) o so actors o production ar ixd or changs only slowly ovr ti, whras th stocks o othr production actors can b incrasd rapidly through conscious invstnt. Land and unskilld labor 1 As will b discussd in Wk 5, howvr, th Japans govrnnt havily protcts dostic arrs. It is likly that this protction has waknd Japans arrs incntiv to iprov thir productivity. 3

4 blong to th orr catgory whras capital and skilld labor ar clarly o th lattr typ. Sinc th stocks o capital and skilld labor ar vry low in poor countris but incras progrssivly in th procss o conoic dvlopnt, th stocks o capital/skilld labor rlativ to thos o land/unskilld labor tnd to b highr in rich countris. Th othr iportant charactristic o actors o production is that individual industris ak us o ths actors in dirnt proportions. Agricultur is land-intnsiv in th sns that it rquirs proportionatly or land than othr production actors in coparison to othr industris (.g., srvics). Siilarly, light anuacturing is highly intnsiv in unskilld (or si-skilld) labor whil th achinry and pharacutical industris ar or intnsiv in capital and high-skilld labor than ar othr industris. Tabl 1. Factor intnsity and ndownts in rprsntativ industris and countris Industry/country Land, unskilld labor Capital, skilld labor Agricultur/ood products 〇 Light anuacturs Havy/high-tch anuacturs 〇 Dvloping countris 〇 Advancd countris 〇 Tabl 1 suarizs th rquirnt and availability o th two typs o production actors in rprsntativ industris and countris. According to this tabl, th rsourc ndownt o dvloping countris is unsuitd to havy/high-tch anuacturs whil that o advancd countris is not suitabl or th production o ood and light anuacturs. Although dvloping countris ay b abl to produc havy/high-tch anuacturs, th scarcity o capital and high-skilld labor is likly to driv up th cost o producing ths goods. In advancd countris, th production o land and un-/si-skilld labor-intnsiv goods, such as ood, will b xpnsiv bcaus o th rlativ scarcity o ths rsourcs. To th xtnt that this is th cas, poor countris will hav a natural coparativ advantag in ood and light anuacturs (such as apparl) whil rich countris is likly to hav a coparativ advantag in havy and high-tch anuacturs. To xain th accuracy o this prdiction, Figur 2 plots data on GD pr capita and th shars o light anuacturs and achinry in total xport arnings or a larg nubr o countris. According to this igur, th shar o light anuacturs is vry high in so low- and iddl-inco countris but invariably low in rich countris. In contrast, th shar o achinry tnds to b largr in high-inco countris, coniring that ths countris hav a coparativ advantag in capital- and skill-intnsiv products. In Figur 2, howvr, thr ar a handul o countris whos inco lvl is rlativly low but whos shar o achinry xports is high, such as Vitna, th hilippins and Mxico. Ths countris ar not, howvr, xcptions to th principl o coparativ advantag. Ths countris ar dply intgratd into intrnational production ntworks and srv as th bass or inal assbly oprations or orign ultinational copanis (MNCs). For xapl, th hilippins iports a lot o capital- and tchnology-intnsiv lctronic coponnts (such as siconductors) ro advancd countris and xports IT quipnt that incorporats ths coponnts. To th xtnt that this is th cas, what th hilippins xports is not th whol IT quipnt but only th un-/si-skilld part o it. W will hav an opportunity to xain intrnational production ntworks and global valu chains as part o our discussion o orign dirct invstnt (FDI) and MNCs in Wk 8. 4

5 Shar in total xports (%) Figur 2. Th inco lvl and th coposition o xports (2015) hilippins Mxico Light anuacturs Machinry 60 Singapor 40 Vitna 20 Nw Zaland 0 2,000 20, ,000 GD pr capita (in dollars, 2011) (Nots) Light anuacturs includ txtils and apparl, lathr products, wood and papr products. Export shars ar calculatd by xcluding nrgy and inral rsourcs ro th total xport valu. Countris that dpnd havily on nrgy/inral rsourc xports or whos population is sallr than on illion ar xcludd. GD pr capita is adjustd or intrnational dirncs in prics and asurd in trs o dollars as o (Sourc) CEII/Burau van-dijk, Chl Databas ( chl). Suggstd Radings: Rinrt, Chap. 3; Sawyr & Sprinkl, Chap. 4. 5