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Sunday, February 28, 2010
David Ricardo was an early proponent of the idea of comparative advantage. Roughly stated, comparative advantage suggests that when a particular economy has an advantage at producing a certain type of good, relative to other goods, it should focus on that good and then trade the surplus to other economies for whatever else it needs.
It helps to think of this at the individual level: a farmer is better off producing one item really well (say, coffee) and selling that item in the market to buy other goods (like clothing), than trying to do everything independently. This also advantages clothing-makers who aren't good at growing coffee by allowing them to focus on doing what they do best. Everyone will be better off if the coffee farmer specializes in coffee. And so it is with countries, says Ricardo.
The trouble is, the concept of comparative advantage isn't very dynamic. There are many reasons why an economy would not want to produce just one good and have to buy everything else (price volatility, poverty, etc). But one cannot simply turn coffee farmers into commercial jet engineers very easily. For resource-rich countries looking to diversify their workforce, the question of how to move up the value-added chain is vital.
Insert the authors of the Product Space. Over at their website, these clever folks have tried to math out the links between different types of goods. The research is based on the notion of proximity, or "that the ability of a country to produce a product depends on its ability to produce other ones. For example, a country with the ability to export apples will probably have most of the conditions suitable to export pears. They would certainly have the soil and the climate, together with the appropriate packing technologies, frigorific trucks and containers. They would also have the human capital, particularly the agronomists that could easily learn the pear business. However, when we consider a different business such as mining, textiles or appliance manufacture, all or most of the capabilities developed for the apple business render useless."
That seems pretty straight-forward, but here's where it gets cool: they try to map out these linkages, and break it down by country. Go ahead, have a look. You'll notice that some goods are linked closely to others, while others are off on their own.
It's too bad they haven't mapped out the United Arab Emirates yet, because they could really use a glance at one of these things. They might then realize that oil production is not in any way linked to "indoor ski hill in the desert." But I doubt it.
It helps to think of this at the individual level: a farmer is better off producing one item really well (say, coffee) and selling that item in the market to buy other goods (like clothing), than trying to do everything independently. This also advantages clothing-makers who aren't good at growing coffee by allowing them to focus on doing what they do best. Everyone will be better off if the coffee farmer specializes in coffee. And so it is with countries, says Ricardo.
The trouble is, the concept of comparative advantage isn't very dynamic. There are many reasons why an economy would not want to produce just one good and have to buy everything else (price volatility, poverty, etc). But one cannot simply turn coffee farmers into commercial jet engineers very easily. For resource-rich countries looking to diversify their workforce, the question of how to move up the value-added chain is vital.
Insert the authors of the Product Space. Over at their website, these clever folks have tried to math out the links between different types of goods. The research is based on the notion of proximity, or "that the ability of a country to produce a product depends on its ability to produce other ones. For example, a country with the ability to export apples will probably have most of the conditions suitable to export pears. They would certainly have the soil and the climate, together with the appropriate packing technologies, frigorific trucks and containers. They would also have the human capital, particularly the agronomists that could easily learn the pear business. However, when we consider a different business such as mining, textiles or appliance manufacture, all or most of the capabilities developed for the apple business render useless."
That seems pretty straight-forward, but here's where it gets cool: they try to map out these linkages, and break it down by country. Go ahead, have a look. You'll notice that some goods are linked closely to others, while others are off on their own.
It's too bad they haven't mapped out the United Arab Emirates yet, because they could really use a glance at one of these things. They might then realize that oil production is not in any way linked to "indoor ski hill in the desert." But I doubt it.
Labels: economic development
