Comparative Advantage, Graham's Theory, and Activity Analysis

1. Consider Mill's model of international trade. It consists of a two-economies, two-commodities world, with only one factor of production in each economy. Mill's conclusion was that, in general, both countries will be fully specialized, and that the post-trade price ratio will depend exclusively on the conditions of reciprocal demand. It was Graham who, more than thirty years ago, showed that Mill's assumption of constant returns to scale is not, in itself, sufficient to justify his conclusion; and that its validity will, in fact, depend on the relative sizes of the two economies and on the relative importance of the two commodities. Graham also first drew attention to the modifications which have to be made in Mill's model if it is to be applied to cases other than that of the two-economies, two-commodities world.2 More recently attempts have been made, notably by Samuelson (1949) and by Makower (1957), to construct activity analysis models of trade. And it has been shown by Whitin (1953), that there exists a strong resemblance between Graham's analysis of the multi-economy, multi-commodity case, and the maximization procedure of linear programming.3 In this paper we will show that, under Mill's assumption of technological differences between the two economies, both his and Graham's conclusions have to be modified when the number of the factors of production is greater than two

Economics · Mathematical economics · Neoclassical economics · Economic theories and models · Economic Theory and Institutions · Economic Theory and Policy

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