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A P P E N D I X A Do RCAs Reveal Comparative Advantage? Oection 2.2 used a diagrammatic analysis to examine whether the numerical values of revealed comparative advantages (RCAs) reflect differences in comparative advantage across nations. This appendix strengthens the conclusions of that analysis by examining the same question within an algebraic framework that is more general than the diagrammatic one.The analysis is conducted assuming that the standard Heckscher-Ohlin model explains the pattern of trade. For that model, the term "comparative advantage" is usually used in a binary fashion: a country either has a comparative advantage in a good or it does not. Given this usage, the RCAs obviously indicate comparative advantage , but for the purposes of empirical work, one would like to make stronger statements than binary ones. Ultimately, the aim of using RCAs is to translate observations on trade into statements about factor endowments. For some of the empirical analyses, such statements require a judgment concerning which country has been relatively more successful in exporting a particular good. That is, one would like to say which of two countries has a "greater comparative advantage" in a particular good.1 To examine whether the RCAs give an appropriate indication of degree of comparative advantage, one must construct a ceterisparibus scenario in which export performance unambiguously rises. It is not sufficient solely to postulate an increase in the value of exports in the good in question, however. If the increase is small and occurs simultaneously with large increases in the exports of other goods, it is not clear that the increase in exports represents a rise in the degree of comparative advantage.2 In the following discussion, it is assumed that the resource endowments of ' Such statements become absolutely necessary in a world in which intraindustry trade occurs, because in that case one cannot rely on either exports or imports being zero as in a pure HeckscherOhlin world. See Section 4.2. 2 It is easy to construct a scenario in which the exports of a good ; increase even if the relative endowment of the factors intensive in its production decrease. This would be the case if, for example, the endowments intensive in some importables decreased a great deal at the same time as the endowments intensive in i declined relative to the average. The exports of i might then increase because of the increase in total trade in the economy as a whole. 230 Appendix A country j have changed in such a way that, if world prices were to remain constant, country / s production of good i would increase, / s production of all other goods would decline, and the value of/s aggregate production would remain constant. If world prices remained constant, then, / s exports of i would increase and the exports of all other goods would decline. This is exactly the scenario under which one would say that/s comparative advantage in good i increases. The following analysis examines whether, after all the resultant changes in the world economy, the increased comparative advantage is reflected in an increase in the value of the appropriate RCA. The difficulty in the analysis, the one ignored in Hillman (1980), is that world prices react to the initial change in endowments, the effect being a decline in the price of i. All countries then react to this price change. In the final equilibrium, j still produces more i than before the change in resource endowments, and its exports of i have increased by dX,r I examine the effect of dXu on x,j, the revealed comparative advantage. In constructing the following argument, it was first necessary to decide on a mode of discourse. A diagrammatic analysis would be impossible, because at several points the argument involves changes in the trade flows of at least three goods.3 A complete algebraic treatment would involve more mathematical , theoretical, and notational setup costs than could be justified, given the status of the argument in the present work. Moreover, the conclusions to be derived are in themselves unexceptionable. Thus, most readers would be willing to accept a discourse at a lower level of rigor than that of a full general equilibrium analysis. In the following I eschew the use of a formal model and employ a combination of verbal and mathematical arguments. Obviously, such arguments require strong simplifying assumptions. There is only one way in which the simplifying assumptions alter the basic economic content of the problem at hand...

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Additional Information

ISBN
9781400860869
MARC Record
OCLC
889251668
Pages
290
Launched on MUSE
2015-01-01
Language
English
Open Access
No
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