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The Absolute Advantage Question

January 14, 2004

Paul Craig Roberts submits that a country will be hurt by free trade if another country has an absolute advantage and there is total mobility of factors of production.

How can a country have absolute advantage in everything?  If Country A can produce *everything* at a lower cost than Country B, then Country B would be totally unemployed and Country B would be unable to purchase anything.  Obviously, the citizens of Country B would then produce their goods for their own private use.  Further, it is obvious, that these citizens of Country B will begin to specialize and trade with other.  Now that Country B is producing again, they can trade with other countries, exporting the products in which they have a comparative advantage.

To simplify the issue, if Country A has an absolute advantage over Country B, Country B simply has to lower the wage rates to compete.  Of course, since Country B is producing the same quantity of goods as it produced before, only wages changed, it's wealth has not really changed.

The only way I can see that Country A can have an absolute advantage in everything is if the costs of government are so high in Country B that even a wage rate of zero would not allow Country A to produce cheaply enough.  But in this case, everybody in Country B would be unemployed and its government would collapse from lack of tax revenue and revolution.

 

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