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Date: | Sun Nov 26 21:27:24 2006 |
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> That's how we get flat earth theories of
> comparative advantages in the face of chronic and
> seemingly intractable trade imbalances.
> John C. Medaille
Comparative advantage has to be applied to the whole
balance of payments, to the totality of exchange, not
just to the current account.
As we know, the imbalance of the current account is
offset by the oppposite balance of the capital
account.
The USA has a comparative advantage in government
bonds, regarded as the safest in the world, in in the
global use of the US dollar, so the US economy trades
treasury bonds for the consumer goods for which
foreign countries have a comparative advantage.
But it is indeed true that the application of concepts
in the history of thought such as comparative
advantage to economic history have to take into
account friction, such as the manipulation of interest
rates by central banks and the fiscal interventions of
government which skew the outcomes from what would be
the case in a pure free market. For example, to the
extent that taxes and excessive regulations make US
exports more expensive, they increase the current
account imbalance.
Fred Foldvary
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