CHAPTER 5

# CHAPTER 5 - CHAPTER 5 TESTS OF TRADE MODELS Tests of the...

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CHAPTER 5: TESTS OF TRADE MODELS Tests of the Classical Model MacDougall Test: Published in1951 He had data for 25 industries in the US and in the UK Exports by industry: Output by industry Labor used by industry Wages by industry Data Year : 1937. Calculate: Productivity by industry for each country = Output/ Labor by industry. US Relative Productivity by industry = Productivity of US by Industry / Productivity of UK by industry. US Relative Wage Rate by industry = W US /W Uk = 2 approximately (as estimated by Mac.) by industry in 1937. US Relative Exports by industry = US Exports by industry/ UK Exports by industry (measures performance by industry in real world ) Comparative Advantage according to the classical model for the case of two countries and two goods : Suppose the U.S. has a comparative advantage in good X . Then, using the limits for the wage ratio with respect to the good in which the US has the greatest absolute advantage (say X ), the classical model requires: Productivity of the US / Productivity of the UK > the wage ratio (= 2 according to MacDougall in his example above) . That is: (1) (Productivity of the US for X/ Productivity of the UK for X) > W US /E*W UK Here we are expressing the upper limit to the wage ratio in terms of relative productivity instead of relative efficiency as we did in chapter 3. Comparative Advantage in the real world or in export performance . The US has a comparative advantage in relative export performance over the UK if: US Exports by industry / UK Exports by industry > 1. (2)

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Those two measures (the Classical model’s comparative advantage and the comparative advantage in relative export performance) in general should be consistent to validate the classical model in addition to having the correct assumptions on the data. The US will have a comparative advantage according to the model and relative export prefromance and consistency in X if (1) and (2) hold (they are consistent) and the data follow the assumptions of the classical model. Those two measures can also be consistent in the case of no comparative advantage and no relative export performance for the US in good X if: Productivity of the US for X/ Productivity of the UK for X) < W US /E*W UK and US Exports by industry / UK Exports by industry < 1. Here the comparative advantage in good X goes to UK. The results of the test (Table 5.1 in the textbook) for most industries support that there is a relationship between real world export performance for the US (Inequality (2)) and relative labor productivity discounted by wages (Inequality (1)). However, they do not validate the classical model. Why? Reasons 1. No complete specialization for the US and the UK. 2.
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CHAPTER 5 - CHAPTER 5 TESTS OF TRADE MODELS Tests of the...

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