Comparative Costs Of Goods
The Riparian model is a very simple one, as it was exposed taking into account only two goods of which a country will specialize and export that in which it has a comparative cost advantage as compared to other country and will import the goods having less comparative advantage (or a comparative disadvantage) in its production cost.
Haberler however suggests a generalized theory of comparative costs applicable to many goods in consideration as follows.
Country I possesses a comparative cost advantage over country II in its exportable relatively to all its importable. So is in the case with country II.
Proof of the theorem
Let us assume that,
Country I has t incur labour costs of a1, b1, c1………. n1 to produce a unity of commodities A, B, C…N.
The supply prices – money cost per unit of these commodities are Pa1, Pb1, Pc1, ….. Pn1, respectively.
Similarly, country II has to incur say a2, b2, c2 … n2 of labour- costs to produce these very goods (A, B, C, .. N) And their supply prices in this country are thus Pa2 Pb2, Pc2 … Pn2,
Suppose, now, the average money wage in country I is W1, and in country II, it is W2,
It thus follows that
In country L:
Pa1 = a1w1: pb1 = b1w1 … Pn1 = n1w1
In country II
Pa2 = a2w2: pb2 = b2w2 … Pn2 = n2w2
Thus it can be said that the relative prices in each country are fixed by the labour costs, as
Pa1 Pb1.. Pn1 = a1: b1 … n1
And
Pa2: Pb2 … Pn2 = a2 : B2 .. n2
For determining the absolute level of the money price, the absolute rates of prevailing money wages have to be included in the data
From costs data alone, however, we cannot draw the dividing line between the categories of good produced by countries I and II. For determining the exact position of the dividing in, we must consider the comparative strength of internaitol demand for the different goods. It has been stressed that a county export and import will depend on the demand pattern once cost conditions are specified. Further, the requirement of foraging exchange equilibrium as well as of balcony of payments equilibrium would fix up the marginal commodity in the export list of each country.
Suppose, now that the balance of payments for country I is adverse (say because of its high imports form country II). Assuming gold standard of the classical era, the gold will flow from country I to II, as a result of this prices and wages will rise in country II and decline in I. that means W1 becomes smaller and W2 greater, so that the quotient W2/W1rise (becoming greater than1). Te dividing line will shift to the right E will now is included in the exports of country 1. Now the balance of payments will tend to be in equilibrium because E is now export; the other export commodities A to D of country have become cheaper, so that aggregate quantum of exports fo I will rise the imports of F, G and Hfrom country II will be dearer, so it will decline. The outflow of gold form country I to II will continue and the dividing line will go on shifting till a perfect equilibrium in the balance of payment is reached.
It is now easy to see that in Recording two commodity model the demand condition has been dispensed with conveniently. In a multi comparative costs doctrine, however, the reciprocal demand conditions have been given due consideration, as it is an important factor determining the quotient W2 W1 R1 which demur cats between the exports and imports of a country. In this way the multi commodity model of Haberler represents an improvement over the Riparian model explaining the same principle fo comparative costs advantage.
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