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

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

Увеличение разрыва цен факторов производства в модели Хекшера-Олина в случае различающегося уровня технологий: простая численная иллюстрация.

One of the main criticisms of the modern trade theories is that they are based on the assumption of equivalent technologies in the trading countries. These theories explicitly assume that the trading partners possess identical technologies, and the difference in the amount of goods produced is solely due to the differences in factor endowments. In effect, opening to trade between two countries with different factor endowments is an optimization problem that redistributes labor and capital between the types of goods produced to maximize the world output. In this optimization problem both trade participants benefit from free trade, and it is possible to make everybody win. But if the two countries possess different technologies, the result is quite opposite. The optimization problem leads to the destruction of capital in the country with less efficient technology. While the main conclusions of the theory – the owners of export-oriented factor of production win and capital-abundant country will export capital-intensive goods and vice versa – will hold, the country with less efficient pre-trade technology will lose the technology altogether, and the total output of that country will fall as a result of free trade

Трагедия бензоколонки: почему "создание высокопроизводительных рабочих мест" снижает производительность труда в масштабах экономики.

The purchase of the most advanced equipment and components seems to be the most obvious way to increase labor productivity and improve the quality of manufactured products of industrial enterprises. However, in the transition economy, if enterprises buy capital goods from abroad, the suppliers of domestic analogues suffer. In this article, we will give a simple illustration that draws an analogy between the task of increasing labor productivity on an economy scale and the well-known Tragedy of the Commons in game theory. Independent economic agents (enterprises), acting individually rationally, lead to a decrease in labor productivity in the economy of the country as a whole

Выживание простейшего: Европейский Союз как добровольно принятый Восточной Европой план Моргентау. Уроки и уникальная возможность для России.

According to the central dogma of international economics, isolation leads to inevitable stagnation, and the only way to development is through open markets and free trade. However, as the experience of the last thirty years has shown, premature opening of the markets of developing countries for free trade with developed countries leads to the destruction of the most advanced industries in developing countries and primitivization of their economies to the level of extraction of natural resources or the simplest production operations on imported equipment, performed by cheap labor. In this article, we will conduct some simple case studies demonstrating the primitivization of the economies of Eastern European countries, which, by joining the European Union, have entered an absolute free trade area with more developed countries. As a consequence, Russia's "isolation" from the developed countries presents a unique opportunity for the reindustrialization of the economy. With successful implementation of a prudent industrial policy, Russia has a chance to become a leader of the developing world in creating a new paradigm of economic development

Factor price divergence in Heckscher-Ohlin model when countries have different technologies: a simple numerical illustration

One of the main criticisms of the modern trade theories is that they are based on the assumption of equivalent technologies in the trading countries. These theories explicitly assume that the trading partners possess identical technologies, and the difference in the amount of goods produced is solely due to the differences in factor endowments. In effect, opening to trade between two countries with different factor endowments is an optimization problem that redistributes labor and capital between the types of goods produced to maximize the world output. In this optimization problem both trade participants benefit from free trade, and it is possible to make everybody win. But if the two countries possess different technologies, the result is quite opposite. The optimization problem leads to the destruction of capital in the country with less efficient technology. While the main conclusions of the theory – the owners of export-oriented factor of production win and capital-abundant country will export capital-intensive goods and vice versa – will hold, the country with less efficient pre-trade technology will lose the technology altogether, and the total output of that country will fall as a result of free trade

Модель специфических факторов производства при разном уровне технологического развития: почему неэффективная промышленность лучше, чем никакой промышленности совсем.

According to the specific factors theory, in free trade between two countries the capital-abundant country exports capital-intensive goods, while the labor-abundant country exports labor-intensive goods. This theory explicitly assumes that the trading partners possess identical technologies, and the difference in the amount of goods produced is solely due to the differences in factor endowments. In effect, opening to trade between two countries with different factor endowments is an optimization problem that optimally redistributes labor between the types of goods produced given the available capital. In this optimization problem both trade participants benefit from free trade. But if the two countries possess different technologies, the optimization problem leads to the destruction of capital in the country with less efficient technology. While the main conclusion of the theory – that capital-abundant (advanced) country will export capital-intensive goods and vice versa – will hold, the country with less efficient pre-trade technology will lose the technology altogether, and the total output of that country will fall as a result of the free trade

Стандартная модель международной торговли и теорема Столпера-Самуэльсона: почему коррупция никак не влияет на экономическое развитие, а от снижения торговых барьеров больше всего страдают олигархи.

The standard model of international trade demonstrates the inevitability of deindustrialization of a developing country in the face of premature liberalization of foreign trade with the developed world. This result is a consequence of elementary mathematical optimization and does not depend on the retreat from democratization and glasnost, the rule of law, or the corruption of the economic or political system. In this article, we will especially emphasize the fact that the reasons for the deindustrialization of the Russian economy should not be sought in any inefficiency of the economic system, but corruption, on the contrary, may have been the engine of economic development in historical examples. In addition, from the consideration of the Stolper-Samuelson theorem, it follows that in a developing country with the liberalization of foreign trade, the oligarchs are the most affected class. The reason for this is the huge amount of capital that is completely incommensurable with the stolen, which is given to foreigners: instead of developing our own machine-building, electronic and other high-tech industries, and growing our oligarchs in these industries, all the money was given without a fight to foreign oligarchs

Дилемма бензоколонки: почему неэффективная промышленность лучше, чем никакой промышленности вообще.

Центральная догма экономики подразумевает, что наилучший экономический результат достигается, когда каждый рациональный агент стремится получить наилучший доступный товар за наинизшую возможную цену. В этой статье мы приведём простую иллюстрацию того, когда эта догма приводит к неоптимальному результату в масштабах экономики государства. Эта иллюстрация покажет, что поведение экономических агентов в развивающейся стране в условиях свободной торговли с развитыми странами эквивалентно хорошо известной в теории игр Дилемме заключённого. Каждый агент, принимая оптимальное для себя решение независимо от других агентов, приводит экономику к неоптимальному равновесию Нэша

Specific Factors Model When Countries Have Different Technologies: Why Inefficient Industry is Better Than no Industry at All

One of the main questions of specific factors theory is whether it is possible to achieve a redistribution of gains from trade such that everybody in both trading countries win. This theory explicitly assumes that the trading partners possess identical technologies, and the difference in the amount of goods produced is solely due to the differences in factor endowments. In effect, opening to trade between two countries with different factor endowments is an optimization problem that redistributes labor between the types of goods produced given the available capital. In this optimization problem both trade participants benefit from free trade, and it is possible to make everybody win. But if the two countries possess different technologies, the result is quite the opposite. The optimization problem leads to the destruction of capital in the country with less efficient technology. While the main conclusions of the theory – the owners of export-oriented factor of production win and capital-abundant country will export capital-intensive goods and vice versa – will hold, the country with less efficient pre-trade technology will lose the technology altogether, and the total output of that country will fall as a result of free trade

Стандартная модель международной торговли, теория игр и деиндустриализация российской экономики.

In the modern (economic) world, it is generally accepted that all countries, in order to grow their prosperity as soon as possible, must follow the principles of free trade, open markets, and unhindered movement of goods and capital. What is it based on? On a completely sincere belief in the infallibility of international trade models, which since the beginning of the twentieth century have shown that free trade leads to an absolute optimization of the use of global resources, and due to this, an increase in production and consumption. This paper pursues the following goals. We will first explain to the reader what these models were, how they evolved, and why, under the conditions in which they were created, they did lead to overall economic growth. We will argue that the assumptions on which these models were built are completely inapplicable to the modern world, in which economic development is determined by the presence of high technology. And further, we will show that under more realistic and current assumptions, these same models lead to the opposite result for developing countries. Namely, to increase, not to reduce, the gap between technologically advanced and developing countries