Benefits and Costs of Following Comparative Advantage

Abstract

This paper is the text of a lecture given on November 20, 1997 to inaugurate the John W. Sweetland Chair in International Economics, in the Department of Economics of the University of Michigan. Its message is that international trade theory, and in particular the theory of comparative advantage, is really just an application of benefit-cost analysis. This is true both of many of the tools of trade theory, which are familiar as the same tools by which benefit-cost examines all sorts of public projects and policies, and of the implications of the theory. Trade theory does not say, as sometimes claimed, that international trade is necessarily and always good for everyone. On the contrary, the theory of comparative advantage identifies both winners and losers from international trade, and the subtlety of the argument, much like many applications of benefit-cost analysis, consists of quantifying and comparing the gains and losses. The paper works through both the partial and the general equilibrium analyses of trade under a range of assumptions from implausibly perfect to realistically messy. It discusses who gains and who loses from trade in each case, as well as the strength of the argument that the gains outweigh the losses.