Ricardian Theory of Comparative Advantage Essay

The measurement error may come from any number of omitted variables.

Researchers also found that when the dependent variable is relative exports, productivity shows slightly better results than unit labor costs, but the reverse is the case when the dependent variable is bilateral trade balances.

In other words, the authors discovered 'fairly strong [empirical] support" for the Ricardian model despite the intense difficulties in structuring international comparisons between productivity and labor compensation (although the authors found their PPP approach valuable). The authors concluded that:

in the vast majority of cases, relative productivity and unit labor cost help to explain U.S. bilateral trade pattern, particularly when sector-specific purchasing-power-parity exchange rates are used. In most cases, only a small part of the variation of trade patterns is explained by the model, but this is common in cross-sectional analysis (Golub & Hseih (2000), p.231).

They concluded that "despite its extreme simplicity, the Ricardian model continues to perform surprisingly well empirically." (ibid.)

Golub and Hseih (2001) were not the only ones who provided empirical support for the Ricardian theory. The Hungarian economist, Bela Balassa, provides further evidence of the confirmation of the Ricardian model. Comparing the ratio of U.S. To British labor productivity, in 1951, for 26 manufacturing industries, he discovered that a positive correlation existed between labor productivity and exports (Choi, & Kwan, 2002 )

In a series of time-series research, Ashenfelter and Jurajda (2001) indicated that wage changes over time corresponded sharply with productivity changes, as see for instance this figure of the U.S.A. where an upward drift in wages between 1973 to 2000 showed a corresponding upward curve in labor productivity.More clearly seen is in this figure of Sweden in the same years, where the fluctuating wwage level shows precisely the same fluctuating pattern in labor productivity. The two therefore seem to be closely correlated. A look into six other countries showed similar significant correlations.

In conclusion, although the Ricardian model is difficult to test and may be obstructed by various limitations, a number of researchers have managed to provide empirical corroboration of the model. Researchers include Macdougall (1951,1952), Stern (1962), Harrigan (1997), Eaton and Kortum (2002), Kerr (2009), and Costinot, Donaldson, and Komunjer (2011). The Ricardian model argues that companies and countries manage to achieve superior results and higher productivity levels due both to increased wages and greater technological / labor advantage. The model may be simplistic and classical but it appears to show enduring effects.

References

Ashenfelter, O. & Jurajda, a (2001). Cross-country comparisons of wage rates, http://www.crei.cat/activities/sc_conferences/12/ashenfe.pdf

Costinot, a., D. Donaldson and I. Komunjer (2011) What Goods Do Countries Trade?

A Quantitative Exploration of Ricardo's Ideas, Review of Economic Studies, forthcom-

ing

Choi, E. Kwan, (2002) Trade and the Adoption of a Universal Language, International Review of Economics and Finance 11, 265-75

Golub, S. & Hseih, CT (2000) Classical Ricardian theory of comparative advantage revisited, Rev. Int. Econ. 8, 221-234

Harrigan, J. (1999) Estimation of Cross-Country Di-fferences in Industry Production

Functions, Journal of International Economics 47, 267-293

Kerr, William R. (2009) Heterogeneous Technology Di-ffusion and Ricardian Trade

Patterns, Working Paper, Harvard Business School

MacDougall, G.D.A. (1951) British and American Exports: A Study Suggested by the Theory of Comparative Costs,.....