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The hypothesis does not take technology, factor endowments and taste into account.
The hypothesis provides no information about the tradeoff: which goods will be imported and exported.
The Japanese economy during the time period of the investigation was compatible with the assumptions of the underlying theory. Conclusion The government in Japan prohibited international trade in 1639
It was allowed to trade with Chinese and Dutch merchants for a small amount on a little island called Nagasaki
Japan was in autarky for more than 200 years
In 1859 Japan opened up to trade
The shift occurred rapidly because of foreign intervention Japan’s History Key Points Net export and price changes for 1869 Hypothesis
Bernhofen and Brown divided the commodities into three groups:
Reasonable close domestic substitues and with autarky price information available.
Goods not produced in Japan under autarky.
Exports and imports with domestic substitues without autarky price information available. Data Collection 3. Exports received no subsidies.
If exports receive subsidies then the trade vector would not only reflect the difference in autarky prices and world prices.
4. Changes in production is not biased towards importables.
If the production was biased towards importables then what is observed as being gains of trade could just be a change in the production. The Neoclassical trade model 1. The vector of autarky prices reflect the outcome of competitive markets.
If autarky prices do not reflect the economy then the result would not be a prediction of the law of comparative advantage.
2. Japanese producers were price-takers in international markets.
When entering free trade a country affecting world prices would diminish the terms of trade and make it difficult to measure the effect of comparative advantage. The Neoclassical trade model Natural experiment - Japan Autarky period: 1851 - 1853
Fairly competitive markets to ensure prices reflect the economy
Free trade period: 1868 - 1875
To ensure reliable trade data
Trade reflect the production possibilities The only case in the world, going from completely autarky to free trade.
Reliable data on autarky prices.
A unique case to test the theory of Deardorff(1980) Natural experiment - Japan Identification Condition The law of comparative advantage involves a comparison of autarky and free trade.
Static trade model assumes that the economy’s production possibilities stay the same.
Autarky price in period 1 vs Free trade price in period 2.
Following Helpman and Krugman (1985) the comparison here is between two potential histories:
Autarky price in period 2 vs Free trade price in period 2. Two potential histories Identical production functions in all countries
Same relative factor endowments in all countries
Constant returns to scale
Identical, Homogeneous preferences in all countries
No Distortions (imperfect competition, externalities, taxes). The No Trade Model – Markunsen(1995) The economy’s net export vector evaluated at autarky prices is negative
In a world with two goods: The economy will export the good with the lower relative opportunity cost.
In a world with more than two goods: It is not possible to predict the import or export patterns of individual commodities.
However the theory can explain the general trade patterns
The theory asserts that, on average, a country will import goods with high opportunity costs and export goods with low opportunity costs , with the valuation taking place at a autarky prices Deardoff (1980)
The correlation version of the law of comparative advantage Huber
Gains of trade
Compare prices before and after autarky in Japan and the world
Narrow range of goods and prices in autarky
Autarky period 1. vs. Free trade period 2
Daniel M. Bernhofen and John C. Brown.
The law of Comparative advantages
Autarky period 2. vs. Free trade period 2. The Major differences J. Richard Huber(1971)
Compare relative commodity prices in Japan and the rest of the world before and after Japan entered world commerce.
Estimate Japan’s gain from trade.
Concluded that Japan is a classic example of a small country.
Terms of trade increased at least 350 % to meet world terms of trade.
Gains from trade: Improved technology and a 65 % increase in real nation income. Empirical findings Estimating Autarky price The aim of the paper:
Provides a direct test of the theory of Comparative advantage(Deardorff – 1980)
Brief history of Japan
No trade model Outline Daniel M. Bernhofen and John C. Brown A Direct Test of the Theory of Comparative Advantage:
The Case of Japan
In this world, there would be no trade and no gains from trade. Time periods Conditions Conditions Records from large trading houses and producers. Effects on Japan's Entry Into World Commerce After 1858 Huber vs. Berhofen and Brown Motivation Outline Methodology Estimating autarky prices
Law of comparative advantage
Natural experiment - Japan
Neo-Classical trade model
Conclusion Concluding remarks J. Richard Huber - Effects on Japan’s entry into World Commerce after 1858
The Major differences
Kozo Kiyota – On Testing the Law of Comparative Advantage On Testing the Law of Comparative Advantage Deardorff(1980):
The theory asserts that, on average, a country will import goods with high opportunity costs and export goods with low opportunity costs , with the valuation taking place at autarky prices.
Aim of the paper: to test the law of comparative advantage - In the case of Japan.
Japan's economic history makes it a unique case, because of the move from completely autarky to free trade.
Relaxes identical production functions and the relative endowments
In the eight investigation years the theory of the law of comparative advantage holds.
Differences from similar literature:
Gains from trade and distributional implication(Huber - 1971).
Test the law of comparative advantage with balanced and unbalanced trade(Kiyota - 2008) The shift from autarky to free trade 12 12 12 The paper reconsider the law of comparative advantage by Deardorff(1980)
Tests the theory by using net exports valued at autarky prices, but also those valued at free trade prices.
Test the theory with both balanced and unbalanced trade.
In two out of eight years the law of comparative advantage does not hold, with unbalanced trade.
They remove the last two years - The law of comparative advantage holds.