Comparative Advantage: From an Individual to the Economy

This paper identifies an internal inconsistency in the Heckscher-Ohlin (H-O) models of international exchange. The inconsistency stems from assuming homogeneity of inputs within a population. This assumption annihilates individual comparative advantage, benefits from exchange and, consequently, existence of autarky prices. In order to remove this inconsistency, I build a two-good multi-individual model by using the microeconomic concept of individual comparative advantage stemming from differences in endowments of qualitatively heterogeneous inputs. The model shows how differences in the distribution of individual production possibilities result in individual specialization, exchange and differences in autarky prices between hypothetically isolated economies. Next, the effect of preference heterogeneity, learning by doing and supply restrictions is examined. In addition to bringing internal logical consistency into the theory of cross-border exchange by demonstrating how price differences between hypothetically isolated economies can be derived from the general neoclassical and Austrian subjectivist principles, this paper addresses the criticisms raised by the labour value theorists. The model can be refined to include comparative advantage in the production of capital goods and differences in the distribution of ownership over natural resources and capital goods. This theoretical approach to inter-local exchange has important policy implications. While the H-O framework lends itself well to conflicting interventionist policies of production allocation based on different interpretations of ambiguous aggregate data, the alternative microeconomic approach acknowledges the importance of the institutional setting in which individual comparative advantage, unknown to an external observer, is discovered, enhanced, and expressed.