Working Paper

Comparative and absolute advantage in the Asia-Pacific region

Abstract: According to classical Ricardian trade theory, overall productivity differences between countries are manifested as differences in real labor incomes (absolute advantage), while the sectoral pattern of productivity differences determines trade patterns (comparative advantage). This paper investigates both of these principles, with a focus on the Pacific Basin. I first examine the trends and relationships between productivity and labor compensation in aggregate manufacturing. Wages and productivity are broadly related, as the theory of absolute advantage suggests. The paper then tests the Ricardian theory of comparative advantage on bilateral and multilateral trade flows using the OECD STAN (Structural Analysis Industrial) database, which disaggregates manufacturing into about 50 sectors for a number of OECD countries, including Mexico and Korea, over 1970-1992. The STAN database is used to calculate bilateral trade patterns, productivity, and unit labor cost by sector. Cross-section seemingly unrelated regressions of sectoral trade flows on sectoral unit labor costs are run for a number of countries vis-a-vis the United States. Comparative advantage helps to explain trade patterns, albeit to a limited degree. In terms of both absolute and comparative advantage, the results for Japan are the most consistent with the Ricardian theory, despite the popular view that Japan is \"different\" and immune from normal mechanisms.

Keywords: Pacific Area; Asia; Wages; Productivity; Labor market; International trade;

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Pacific Basin Working Paper Series

Publication Date: 1995

Number: 95-09