312
See also: Protectionism and trade 34–35 ■ Comparative advantage 80–85 ■
Economies of scale 132 ■ Market integration 226–31E
conomists used to believe
that nations traded with
each other because they
were different: tropical countries
sold sugar to temperate countries,
temperate ones exported wool.
Some countries were better at
producing certain things—they
had a “comparative advantage”
because of their weather or soil.
However, there is good reason
to believe that this is not the whole
story. In 1895, Catherine Evans
from Dalton, Georgia, was visiting
a friend and noticed a homemade
bedspread. Inspired, she made a
similar one and began to teach
others. Soon, textile firms sprung
up, creating a carpet industry that
came to dominate the market. This
contradicted the usual explanation
of international trade, since
Georgia has no comparative
advantage for making carpet.Quirk of history
In 1979, US economist Paul
Krugman proposed a new theory
that allowed for the influence of
accidents of history, such as anindustry arising from a chance
event in Georgia. He observed that
a lot of trade goes on between
similar economies. Production has
economies of scale: the initial outlay
for a car plant means that costs are
lower the more cars are made. Either
country could make cars, but once
one starts, it builds up a cost
advantage that is hard for the other
to erode. So a region may end up
dominating trade in a good due
purely to quirks of history. ■COMPARATIVE
ADVANTAGE IS
AN ACCIDENT
TRADE AND GEOGRAPHY
IN CONTEXT
FOCUS
Global economyKEY THINKER
Paul Krugman (1953– )BEFORE
1817 David Ricardo says
that countries have
comparative advantages
due to physical factors.1920s and 1930s Eli
Heckscher and Bertil Ohlin
argue that capital-abundant
countries export capital-
intensive goods.1953 Wassily Leontief finds
an empirical paradox: the US,
a capital-abundant country,
has relatively labor-intensive
exports, in violation of existing
trade theories.AFTER
1994 Gene Grossman and
Elhanan Helpman analyze
the politics of trade policy,
examining the effect
of lobbying on the level of
protection given to firms.Regions that for historical
reason have a head start as
centers of production will
attract even more producers.
Paul Krugman