Division of Labor and Endogenous Comparative Advantage: A Smith-Ricardian Model of International Trade

Abstract

This paper develops a Smith–Ricardian model that incorporates division of labor into the continuum-good Ricardian model of Dornbusch et al. (1977). The tradeoff between the efficiency gain and coordination cost in production determines the efficient level of division of labor. Consequently, the traditional comparative advantage becomes endogenous. The model is able to explain how the recent progress in information technology (IT) would affect the efficient level of division of labor and competitive margin. In particular, we show that absolute advantage in division of labor and relative labor supply play a crucial role in determining the different effects of universal IT progress on a country’s competitive margin in international trade.