Comparative Advantage - Modern Theories

Modern Theories

Classical comparative advantage theory was extended in two directions: Ricardian theory and Heckscher-Ohlin-Samuelson theory (HOS theory). In both theories, the comparative advantage concept is formulated for 2 country, 2 commodity case. It can easily be extended to the 2 country, many commodity case or many country, 2 commodity case. But in the case with many countries (more than 3 countries) or many commodities (more than 3 commodities), the notion of comparative advantage loses its facile features and requires totally different formulation. In these general cases, HOS theory totally depends on Arrow-Debreu type general equilibrium theory but gives few information other than general contents. Ricardian theory was formulated by Jones' 1961 paper, but it was limited to the case where there are no traded intermediate goods. In view of growing outsourcing and global procuring, it is necessary to extend the theory to the case with traded intermediate goods. This was done by Shiozawa's 2007 paper. Until now, this is the unique general theory which accounts traded input goods.