Some empirical tests of the classical comparative cost theory



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Recent attempts are made to empirically test the classical comparative cost theory. The pioneer effort in this direction was initiated by MacDougall and was carried forward by Stern, Balassa, Bhagwati, and MacDougall himself. The results so obtained are both complementary and conflicting, although a greater degree of empirical relevance has been observed in the Ricardian model than in the Heckscher Ohlin theorem. However, the seemingly strong empirical relevance of the classical comparative cost theory appears to have failed to enjoy unequivocal support of all economists. Bhagwati, for example, casts some doubt on the practical utility of the Ricardian hypothesis. Heller contends that the strong positive empirical evidence of MacDougall, Stern, and Balassa concerning the usefulness of the Ricardian approach must be treated with caution until firm conclusive evidence becomes available. The strong empirical evidence of the classical theory, therefore, must be further verified by using a larger and different set of data including many more pairs of countries. It is the purpose of this dissertation to add to the existing tests of the classical comparative theory of the basis of trade in view of the fact that Stern and Balassa did not use all of the data available to them, and because comparable data exist for two other sets of countries whereas the three previous tests applied to only one set of countries, i. e., the United States and the United Kingdom, The use of more comprehensive data, it is hoped, would aid in presenting a rigorous test of the classical hypothesis and add to the body of existing evidence. In view of the objective stated above the classical comparative cost theory was tested by utilizing data for three sets of countries; the United Kingdom and the United States, Argentina and the United States, and Australia and Canada, The statistical estimation procedure employed in this study was simple and multiple correlation of data. The comparative productivities in each country were defined in terms of a single factor of production, i.e., labor, In addition to labor productivity measure, wage ratio and capital productivity were introduced as explanatory variables to determine their influences on the explanation of export trade shares, The evidence presented in this dissertation supports the results of the previous empirical studies of MacDougall, Stern, and Balassa for countries at similar levels of economic developments as, for example, the United Kingdom and the United States and Australia and Canada. However, inconclusive results are obtained when the theory is tested by utilizing data for countries at dissimilar levels of economic development as, for example, the United States and Argentina. Detailed theoretical and empirical reasons are presented in a separate chapter to explain why the test of the classical comparative cost theory involving two countries at different levels of development may be a special case. The concluding chrpter summarizes the results of the study and makes recommendations for future research.



Comparative cost theory