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How to apply trade theory to the German unification? Making sense of ‘comparative advantage in nothing’

Thomas, Ziesemer (1999): How to apply trade theory to the German unification? Making sense of ‘comparative advantage in nothing’.

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Abstract

We derive several cases of 'comparative advantage in nothing', which can be relevant for East Germany. The simplest case with little relevance is the HO assumption of identical technologies across regions implanted into the Ricardian model. The second is the case with full employment wages leading to migration and unification in the West also within the Ricardian model. The third case is with Western wage levels and prices in the East but lower productivity in all sectors, leading to negative profits and 100% unemployment also in the Ricardian model. Fourth, independent of wage rigidities, high transport costs stemming from insufficient infrastructure may lead to having a non-traded goods sector comprised of the whole economy. Fifth, in a HO model, augmented to have a factor land and an absolute technological advantage of the West, an excess of eastern wages over productivity-adjusted western wages can lead to a tie in which the East loses its comparative advantage in labour-intensive goods. Finally, modeling a non-traded sector and perfect capital movements under the assumption of the East being a small country on the goods, capital and labour markets, too high fixed wages in the sector of traded goods may lead to no exports of goods. All people are employed in the non-traded goods sector - if the latter is not bound to the fixed wages – or emigrate. Thus there are many reasonable cases of ‘comparative advantage in nothing’ containing relevant problems of East Germany. They appear either in the form of systematic rather than accidental ties with unemployment or in the form of production concentrated in the non-traded goods sector jointly with factor movements.

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