Capital mobility and Trade

Article on Cafe Hayek.

An excerpt:

“There are only two ways for international factor mobility to deprive a country—call it ‘Ricardia’—of all comparative advantage and, hence, deny that country the opportunity to gain from specialization and trade with people in other countries. Both of these ways are extraordinarily unlikely; they are the equivalent of a single monkey banging on a typewriter and by chance typing Hamlet.

One way is when factor mobility causes an international reshuffling of factors of production that results in every country in the world having the same internal costs as Ricardia of producing each and every good and service. If such a outcome were to emerge, it would indeed be true that factor mobility eliminated all comparative ad- vantage (and comparative disadvantage) for Ricardia with respect to every other country in the world. Also, all potential gains to the people of Ricardian from international specialization and trade would be eliminated. (Comparative advantage will continue to drive specialization and trade within Ricardia.) There will be no international trade for Ricardia’s government to prevent or to regulate.”

Another excerpt:

For Advantia’s “absolute” advantage to render the principle of comparative advantage inapplicable to international trade, literally all factors of production—or, at least, all people—must move to Advantia. If even a single person remains in a country other than Advantia, then this person will almost certainly enjoy a comparative advantage at producing some quantity of some good or service over the people of Advantia, and mutually advantageous international trade will therefore be possible.

And another:

Whether or not international capital mobility impoverishes or enriches workers depends on why capital migrates. Higher taxes, more burdensome regulations, and a long list of other such investment-discouraging policies would reduce the size of America’s capital stock and make Americans poorer. If such policies are sufficiently harsh, the resulting exodus of capital (either through migration or depreciation or both) might well be massive. But capital can migrate to other countries for perfectly healthy reasons—for example, if other countries improve their own investment climates. Such healthy migrations are unlikely to diminish the size of America’s capital stock.

Another article


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