Capital goods and the chain of comparative advantage

Working papers | 2021 | N 93

Abstract

In this article we study the effects of changes in the distribution of income on comparative costs and show that the presence of capital goods dramatically affects the possibility of constructing a "chain of comparative advantages" that allows explaining the direction of international trade. In particular, we show that i) the comparative costs of autarky are poor predictors of the specialization pattern because, under the presence of imported capital goods, the costs do not vary proportionally with the relative wage rate; ii) to ensure that “a single cut in the chain” allows exported and imported goods to be separated, at most a single good can be used as an intermediate input and that, when capital is made up of heterogeneous goods, the chain of comparative advantages It may not even be well defined. iii) We also show that changes in the profit rate can alter the ordering of the links in the chain, even under conditions in which the chain is well defined for a constant profit rate (e.g. null); and, additionally, iv that) the plausibility that the chain of comparative advantages requires multiple links for the same industry increases with the value of the profit rate.

JEL classification: B51, F10, F16