I agree, but I don’t see how that supports free trade in quite the way Krugman used it. When the countries are outwardly similar, the partner’s “comparative advantage” is then often an economy of scale, which is a good reason to centralize, or a capital investment, which isn’t necessarily. Then free trade is made a bit more transparent and we can start arguing about what we want to maximize—efficiency or [insert metric here].
But sadly, I’m pretty sure that sometimes there’s no comparative advantage at all. Sometimes trade is profitable even if you don’t have any advantage, so long as the cost of shipping is less than the profit margin at the market price. People are irrational, and squeezing even a little extra profit out of this fact would allow for all sorts of semi-useless trade.
Note that I agree that there is still “ordinary” comparative advantage out there, among this other stuff. But I think that this other stuff, while fairly indifferent to efficiency, can be harmful to [metric of choice] (say, assign negative value to burning fossil fuels).
Sometimes trade is profitable even if you don’t have any advantage, so long as the cost of shipping is less than the profit margin at the market price.
If the cost of shipping is less than the profit margin, that means that someone is willing to buy something from you for more than it costs you to make it—which, in an ideal market, is pretty much equivalent to having a comparative advantage. (I think.)
Sometimes. The existing competitors might lose more profit by dropping price to drive out the newcomer than they would by just allowing the competition. This should become more common as the cost of shipping becomes smaller relative to the profit margin.
If by competitive you mean “competition drives down prices as far as they will go,” I would disagree that that’s how the world works.
I agree, but I don’t see how that supports free trade in quite the way Krugman used it. When the countries are outwardly similar, the partner’s “comparative advantage” is then often an economy of scale, which is a good reason to centralize, or a capital investment, which isn’t necessarily. Then free trade is made a bit more transparent and we can start arguing about what we want to maximize—efficiency or [insert metric here].
But sadly, I’m pretty sure that sometimes there’s no comparative advantage at all. Sometimes trade is profitable even if you don’t have any advantage, so long as the cost of shipping is less than the profit margin at the market price. People are irrational, and squeezing even a little extra profit out of this fact would allow for all sorts of semi-useless trade.
Note that I agree that there is still “ordinary” comparative advantage out there, among this other stuff. But I think that this other stuff, while fairly indifferent to efficiency, can be harmful to [metric of choice] (say, assign negative value to burning fossil fuels).
If the cost of shipping is less than the profit margin, that means that someone is willing to buy something from you for more than it costs you to make it—which, in an ideal market, is pretty much equivalent to having a comparative advantage. (I think.)
You’re correct. Simple example here. Transportation costs are added to other costs, and the same analysis follows from there.
Transaction costs are not really different from other costs, economists just like to highlight them because they’re often forgotten.
Sometimes. The existing competitors might lose more profit by dropping price to drive out the newcomer than they would by just allowing the competition. This should become more common as the cost of shipping becomes smaller relative to the profit margin.
If by competitive you mean “competition drives down prices as far as they will go,” I would disagree that that’s how the world works.