On absolute and comparative advantage in international trade: A Pasinetti pure labour approach

This paper builds upon Pasinetti's pure labour model, formalizing some of the insights that he has pro-vided into the structure of international trade. A systematic approach is followed, starting with restrictive assumptions that are relaxed in subsequent stages of analysis. The starting point is a model in which two countries, one advanced and the other underdeveloped, have equal costs of production. This implies that there are no incentives for trade. At a second stage, we introduce and formalize the conditions required for these countries to exhibit absolute cost advantages, based on wage disparities. Finally, the paper es-tablishes the conditions required for comparative advantage, based on relative differences in technology. Building on an interpretation of Ricardo's writings on trade, it is shown that absolute advantage is crit-ical for the two countries to realise potential cost reductions afforded by comparative advantage. This abstract insight, based on the Pasinetti pure labour system, suggests that absolute advantage has a more fundamental role in international trade than given by previous studies, which focus more on either the international mobility of money capital or the international fragmentation of production. Crown Copyright (c) 2021 Published by Elsevier B.V. All rights reserved.

Automated summary

This paper builds upon Pasinetti's pure labour model to analyze the structure of international trade. It introduces the concepts of absolute and comparative advantage based on wage disparities and technology differences, emphasizing the fundamental role of absolute advantage in realizing cost reductions in international trade.