GEP Seminar - Daniel Bernhofen (American University)

NB:  This seminar is on a Monday

Title: David Ricardo’s 1817 comparative advantage formulation at 200: a brief history and new insights

Abstract:   This year marks the 200th anniversary of Ricardo’s famous passage on comparative advantage, published in his Principles of Political Economy and Taxation. This passage employs what Paul Samuelson (1969) so vividly labeled as Ricardo’s ‘four magic numbers’. Following the lead of James Mill (1844), Ricardo’s four numbers have been interpreted as labor unit coefficients and this interpretation has been the engine for the development of the ‘Ricardian trade model’ from John Stuart Mill (1848) to Eaton and Kortum (2002).

A disturbing aspect of interpreting Ricardo’s numbers as unit labor coefficients is that Ricardo’s exposition makes little logical sense and this has invited many notable economists to question Ricardo’s role in the discovery of comparative advantage. Resurrecting a neglected paper by Sraffa (1930), Ruffin (2002) rescued Ricardo from the assault of logical inconsistency and convincingly argued that Ricardo’s numbers pertain to the labor embodied in actual trade.

Building on Sraffa and Ruffin’s interpretation, this paper aims to convey some amazing features of Ricardo’s formulation that should be of interest to all teachers of comparative advantage. The features include: (i) an integrated treatment of the pattern and gains from trade, (ii) the incorporation of trade costs, (iii) a ‘labor growth equivalent" metric of the gains from trade that is isomorph and less restrictive than Samuelson’s 1939 consumer expenditure metric, (iv) an intuitive generalizability to a multi-factor setting. We then apply this multi-factor generalization of Ricardo’s gains from trade metric to a data set of 19th century Japan. Comparing the magnitude of Ricardo’s gains from trade metric to Samuelson’s gains from trade metric in Bernhofen and Brown’s (2005) Japan study, we find similar results.