This is a discussion I had with a friend and decided to write about this here since I think it is relevant to the overall theme of the blog.
This blog is about trade imbalances and their reasons. The primary idea behind trade is absolute and relative competitive advantage. I make more of what I am good at and I trade for the rest with the surplus I generate.
What I am good at will be relative to what other's are good at, and this leads to the idea of absolute and comparative competitive advantage. If I have absolute competitive advantage, I will dominate trade. This is what happened in China over the last 20 years as the government followed protectionist policies, kept the currency pegged and subsidised the manufacturing sector. The Chinese manufacturing companies got an absolute competitive advantage in trade and thus they dominated global trade, generating record surpluses. Other manufacturing economies that did not enjoy such absolute competitive advantage, saw high trade deficits and high unemployment.
A good way to measure absolute and comparative competitive advantage would be productivity per capita. Productivity could be measured as the net output divided by the net resources consumed, the resources could be time, capital or energy. If we look at the productivity per capita in IT sector in India, it is pretty high, leading to high value of IT exports.
Productivity per capita in agriculture in India is low and so the sector needs a lot of government support. Rice exports have to be subsidised to be globally competitive. There are curbs on sugar exports during sugar scarcity. Some food imports are heavily taxed.
In light of this, I think the share of a global trade contributed by a specific country would be proportional to its absolute or comparative relative advantage vis-a-vis other countries. This correlation could be a useful means to study trade cartels and trade nexuses where trade shares of members are not proportional to their productivity. Absolute and comparative advantages could be measured using productivity per capita metrics for the specific industries.
This blog is about trade imbalances and their reasons. The primary idea behind trade is absolute and relative competitive advantage. I make more of what I am good at and I trade for the rest with the surplus I generate.
What I am good at will be relative to what other's are good at, and this leads to the idea of absolute and comparative competitive advantage. If I have absolute competitive advantage, I will dominate trade. This is what happened in China over the last 20 years as the government followed protectionist policies, kept the currency pegged and subsidised the manufacturing sector. The Chinese manufacturing companies got an absolute competitive advantage in trade and thus they dominated global trade, generating record surpluses. Other manufacturing economies that did not enjoy such absolute competitive advantage, saw high trade deficits and high unemployment.
A good way to measure absolute and comparative competitive advantage would be productivity per capita. Productivity could be measured as the net output divided by the net resources consumed, the resources could be time, capital or energy. If we look at the productivity per capita in IT sector in India, it is pretty high, leading to high value of IT exports.
Productivity per capita in agriculture in India is low and so the sector needs a lot of government support. Rice exports have to be subsidised to be globally competitive. There are curbs on sugar exports during sugar scarcity. Some food imports are heavily taxed.
In light of this, I think the share of a global trade contributed by a specific country would be proportional to its absolute or comparative relative advantage vis-a-vis other countries. This correlation could be a useful means to study trade cartels and trade nexuses where trade shares of members are not proportional to their productivity. Absolute and comparative advantages could be measured using productivity per capita metrics for the specific industries.
