The comparative advantage fallacy and a rule for convergence

Abstract

The gains from trade argument is based on the principle of comparative advantage. However, this principle is predicated on tacitaxioms, presenting an argument which supports a proposition different tothe one it purports to prove. This paper presents an alternative treatment,using a leader-follower model to show that free trade can in fact accentuatedifferences and growth disparities between countries. More importantly, itargues that the follower economy can catch up with the leader economyonly if the ratio between the income-elasticity of the follower country's exports to the rest of the world and the income-elasticity of its imports isgreater than the ratio between the induced productivity of the leader andthat of the follower country. This is our rule for convergence.