On absolute and comparative advantage in international trade: A Pasinetti pure labour approach

Machado, Pedro S. and Trigg, Andrew B. (2021). On absolute and comparative advantage in international trade: A Pasinetti pure labour approach. Structural Change and Economic Dynamics, 59 pp. 375–383.

DOI: https://doi.org/10.1016/j.strueco.2021.09.005

Abstract

This paper builds upon Pasinetti's pure labour model, formalizing some of the insights that he has provided into the structure of international trade. A systematic approach is followed, starting with restrictive assumptions that are relaxed in subsequent stages of analysis. The starting point is a model in which two countries, one advanced and the other underdeveloped, have equal costs of production. This implies that there are no incentives for trade. At a second stage, we introduce and formalize the conditions required for these countries to exhibit absolute cost advantages, based on wage disparities. Finally, the paper establishes the conditions required for comparative advantage, based on relative differences in technology. Building on an interpretation of Ricardo's writings on trade, it is shown that absolute advantage is critical for the two countries to realise potential cost reductions afforded by comparative advantage. This abstract insight, based on the Pasinetti pure labour system, suggests that absolute advantage has a more fundamental role in international trade than given by previous studies, which focus more on either the international mobility of money capital or the international fragmentation of production.

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