What May Be Concluded from the Law of Comparative Advantage

Abstract

I adopt the simple model of the law of comparative advantage which still holds up today but often is regarded as oversimplified or invalid in the modern world. The reason I use this version is the presence of money which serves only as a medium of exchange and an accounting unit i.e. countries are not interested in holding any balances of money so money in this example does not serve as a store of value and does not contribute to any advantage itself. On the base of this model I define the crucial condition for the beneficial international trade as it defines the set of exchange ratios between the traded commodities which may give a comparative advantage in trade for both countries. It shows also that when the exchange relation reaches the limiting values only one country benefits from trade i.e. receives a comparative advantage but the second country has the same conditions as without international trade so in this case a self-sufficiency is better and more secure than international trading. But when the exchange relation exceeds the limiting values of the above mentioned condition one country not only retains but also increases its comparative advantage while the second country even begins to incur loss from this trade what might be called comparative disadvantage or comparative loss. After introducing money the above mentioned conclusions concern the exchange rates of the countries trading internationally. This entitles to the other conclusion: that many depressive economic events could be explained even in considerable part by this theory and could indicate some preventing measures to avoid them or to diminish their influence. This might particularly concern the present situation of the euro area.