Ricardo's Theory of Comparative Advantage-Old Idea New Evidence-Costinot and Donaldson

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NBER WORKING PAPER SERIES

RICARDO'S THEORY OF COMPARATIVE ADVANTAGE:
OLD IDEA, NEW EVIDENCE
Arnaud Costinot
Dave Donaldson
Working Paper 17969
http://www.nber.org/papers/w17969

NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
April 2012

We thank Pol Antràs, Chang-Tai Hsieh, and Esteban Rossi-Hansberg for comments and Meredith McPhail and Cory Smith for excellent research assistance. This paper has been prepared for the 2012 American Economic Review Papers and Proceedings. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

© 2012 by Arnaud Costinot and Dave Donaldson. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

Ricardo's Theory of Comparative Advantage: Old Idea, New Evidence Arnaud Costinot and Dave Donaldson
NBER Working Paper No. 17969
April 2012
JEL No. F11,Q11,Q15,Q17,R14
ABSTRACT
When asked to name one proposition in the social sciences that is both true and non-trivial, Paul Samuelson famously replied: 'Ricardo's theory of comparative advantage'. Truth, however, in Samuelson's reply refers to the fact that Ricardo's theory of comparative advantage is mathematically correct, not that it is empirically valid. The goal of this paper is to assess the empirical performance of Ricardo's ideas. We use novel agricultural data that describe the productivity in 17 crops of 1.6 million parcels of land in 55 countries around the world. Crucially, this dataset contains information about the productivity of each parcel of land in all crops, not just those that are currently being grown. This direct information about relative productivity differences across economic activities allows us to compute, for the first time, the output predicted by Ricardo's theory of comparative advantage. Despite all of the real-world considerations from which this theory abstracts, we find that Ricardo's theory of comparative advantage has significant explanatory power in the data, at least within the scope of our analysis.

Arnaud Costinot
Department of Economics
MIT, E52-243B
50 Memorial Drive
Cambridge MA 02142-1347
and NBER
costinot@mit.edu
Dave Donaldson
MIT Department of Economics
50 Memorial Drive, E52-243G
Cambridge, MA 02142-1347
and NBER
ddonald@mit.edu

1

Introduction

The anecdote is famous. A mathematician, Stan Ulam, once challenged Paul Samuelson to name one proposition in the social sciences that is both true and non-trivial. His reply was: ‘ Ricardo’ theory

s
of comparative advantage’ see Paul Samuelson (1995, p. 22). Truth, however, in Samuelson’ ;
s
reply refers to the fact that Ricardo’ theory of comparative advantage is mathematically correct, s
not that it is empirically valid. The goal of this paper is to assess the empirical performance of Ricardo’ ideas.
s
To bring Ricardo’ ideas to the data, one must overcome a key empirical challenge. Suppose, as s
Ricardo’ theory of comparative advantage predicts, that di¤erent factors of production specialize s
in di¤erent economic activities based on their relative productivity di¤erences. Then, following Ricardo’ famous example, if English workers are relatively better at producing cloth than wine s
compared to Portuguese workers, England will produce cloth, Portugal will produce wine, and at least one of these two countries will be completely specialized in one of these two sectors. Accordingly, the key explanatory variable in Ricardo’ theory, relative productivity, cannot be s

directly observed.
This identi…cation problem is emphasized by Alan Deardor¤ (1984) in...
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