Saturday, March 5, 2011
Trade Theory - Pages 180-183
In the mid-seventies, MIT graduate Paul Krugman began to question the accepted theory of trade. For centuries, it was believed that specialization existed in a natural pattern, based on the natural resources found within a given nation. Perfect competition and constant returns to scale were the forces that governed the interaction between nations. However, this standard view of international trade seemed strained with the advancements of the Japanese. Japan’s protected home market seemed to provide the nation with a practice field where the advantages of scale could be achieved. Once achieved, lower prices in foreign markets put the nation in position to dominate. The example of the Japanese suggests the possibility of manipulation by nations, who through coordinated effort may achieve advancements to put themselves ahead.
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A for Jim.
ReplyDeleteFWIW: I had to buy Foundation in 1984. I was traveling in Austria and it was the only English language book I could find for a long train ride. I enjoyed it, as Krugman did, and as I was entering my senior year in economics, I found it very inspiring. It gave (fictional) relevance to the econometrics classed I'd had.
Extra credit to the first person to comment about what the Stolper-Samuelson theorem says about the relationship between trade and prices.