Is Comparative Advantage Obsolete?
It is sometimes said that the theory of comparative advantage is nearly
200 years old, and things have changed so much since then that the
theory must surely be obsolete.
Contrary to such assertions, comparative advantage remains an important
and valid economic concept. At any one time—because comparative
advantage is reflected in international relative prices, and these relative
prices determine what goods a country will import and what it will export
—the operation of the price system will result in trade that follows the
current pattern of comparative advantage. For example, if Canadian costs
of producing steel are particularly low relative to other Canadian costs,
Canada will export steel at international prices (which it does). If
Canada’s costs of producing textiles are particularly high relative to other
Canadian costs, Canada will import textiles at international prices (which
it does). Thus, there is no reason to change the view that David Ricardo
long ago expounded: Current comparative advantage is a major determinant
of trade under free-market conditions.
The Role of Public Policy
What has changed, however, is economists’ views about the determinants
of comparative advantage. It is now clear that current comparative
advantage is more open to change by private entrepreneurial activities