Brief Notes on the Empirical Studies in the Doctrine of Comparative Cost

Recently several studies have been made in empirical research in the doctrine of comparative cost to investigate its explanatory value in determining trade patterns.

Empirical studies made by MacDougall, Robert Stern and Bela Belassa are the major ones in this regard. All of them have compared the data for U.K. and U.S.A. between 1937 and 1950. In! order to avoid the necessity of estimating the effects of tariffs, these economists have compared the I export performance of the two countries in a third market, assuming that the trade barriers tend to I affect the exporters equally, when differences in export patterns would clearly be the outcome of I comparative costs and not tariffs as such.

In this regard, MacDougall set forth a hypothesis, to reformulate the Ricardian doctrine, that “a I country tends to export those products in which its productivity per unit input is relatively higher than I in other countries.”

In consideration of the data for U.K. and U.S.A. exports the hypothesis was I thus, derived that the U.S.A. will seize a lion’s share of the third market when its labour productivity I is higher than that of U.K. The relatively high American labour productivity implies its lower labour I costs indicating that the U.S.A. has a comparative costs advantage in such exportables in comparison I to the U.K.

For empirical study, MacDougall examined the relationship between (i) the ratio of U.S. exports to U.K. exports I of a series of products, and (ii) the ratio of U.S. to U.K. labour productivity regarding these products.

Assuming I the first ratio to be y and x, the hypothesis may be set as: “a higher x causes a higher y.” This is in line with the Ricardian hypothesis that relative labour productivity is a fundamental factor determining comparative costs I advantage.

Using the regression analysis, empirically it was found true by these investigators. For instance, Stern found the relationship:

The high degree of positive correlation sustains the hypothesis and suggests that the Ricardian model has explanatory value. Caves as such remarks that “the classical theory of international trade may earn its place today because of its empirical relevance.”