Vanek-Reinert Effect as a Corollary of Ricardo’s Comparative “Advantage”: a Simple Numerical Illustration

Spirin, Victor (2021): Vanek-Reinert Effect as a Corollary of Ricardo’s Comparative “Advantage”: a Simple Numerical Illustration.

Abstract

Proponents of free trade contend that trade liberalization benefits all participants, regardless of whether the country is advanced or developing. There is another benefit to free trade, some economists argue, specifically for the developing nations. According to these economists, the trade-liberalizing developing country will benefit from technology transfer from advanced countries. Here we aim to provide a simple illustration that both these arguments are in direct contradiction with a basic economic optimization principle – and the canonical foundation of international trade – specialization by Ricardo’s comparative advantage.

• Item Type: MPRA Paper
• Language: English
• Keywords: International Trade, Comparative Advantage, Constrained Optimization, Vanek-Reinert Effect
• Subjects: F - International Economics > F1 - Trade; F - International Economics > F6 - Economic Impacts of Globalization; F - International Economics > F6 - Economic Impacts of Globalization > F63 - Economic Development

References

1. It has been observed that upon trade liberalization the most efficient industries in the less developed countries are the first to become extinct. This is known as Vanek-Reinert effect. https://www.un.org/en/ecosoc/meetings/2005/docs/Reinert.pdf, Page 9 2. Ricardo Hausmann and Dani Rodrik, https://drodrik.scholar.harvard.edu/files/dani-rodrik/files/doomed-to-choose.pdf, Page 3. 3. Ricardo, David (1817), On the Principles of Political Economy and Taxation (1 ed.), London: John Murray, ISBN 9783487409290. 4. One of the best books on optimization is Bertsekas, Dimitri P. (1982). Constrained Optimization and Lagrange Multiplier Methods. New York: Academic Press. ISBN 0-12-093480-9. 5. Eric Reinert https://mpra.ub.uni-muenchen.de/47909/1/MPRA_paper_47909.pdf. Section 3.2 Quality of Industrial Change shows that international competitiveness and quality of industrial structure in new EU members from Central and Eastern Europe deteriorated from 1980 to 2000. 6. In our previous paper https://mpra.ub.uni-muenchen.de/107780/1/MPRA_paper_107780.pdf we gave a simple illustration that given differentiated value of labor the overall production and consumption optimum also corresponds to the more advanced economy benefiting disproportionately at the expense of the less-advanced one. That illustration was a static equilibrium rather than a dynamic process.