Monday, October 20, 2008

New dimension to Trade theory

You might be well aware of David Ricardo's 'Theory of Comepetitive advantage' which advocates that the countries which are relatively competitive enough in producing different goods/services should participate in trade ( E.g. you are a better baker and i am a better shoe maker, the trade between us improves the prospects of both of us). This basic idea of trade relevence dominated the thought of International economics and trade, in a way it laid the path of economic thinking of international trade.  

Paul Krugman is one of the first to realize that those kinds of path dependent models only explained about half of the trade in the world, and he became the first one to explain economicially why it (also) made sense that countries that are similar should trade as opposed to courtries that are differnt. He explains that  such trade between the countries that are similar, enables specialisation and large-scale production, which results in lower prices and greater diversity of commodities. The development of large scale production for the world market has contributed significantly for the enhancement of standard of living of most of the countrymen (mostly in developing counries)  by the way of attracting more people to cities and higher wage rates.  Paul in his path breaking work on trade theory showed how economics of scale influence trade and urbanization.

(The author has greatly benefited from the writings of Simon Kennedy and Rich Miller)

Comments and further contributions are encouraged!!

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