Re: investment and unemployment

[Warren Mosler <mosler@xxxxxxxx>]

>

>

Comparative advantage also assumes full employment as a precondition.
Perhaps that is the most 'misunderstood' points among economists?



> According to the principle of comparative advantage, countries A and B
> still stand to benefit from trading with each other even if A is better
> than B at making everything. If A is more superior at making automobiles and only
> marginally superior at making bread, then A should still invest resources in what
> it does best - producing automobiles - and export the product to B. B should still
> invest in what it does best - making bread - and export that product to
> A, even if it is not as efficient as A. Both would still benefit from the trade
> because trade expanded the market. A country does not have to be best at anything
> to gain from trade. That is comparative advantage.
>
> The theory is one of the most widely accepted among trade economists. It
> is also one of the most misunderstood among non-economists because it is
> confused with absolute advantage. It is often claimed, for example, that
> some countries have no comparative advantage in anything. That is
> virtually impossible. So argues pro-traders.  Both US labor and Third
> World economic nationalists dismiss the theory of comparative advantage
> by pointing out that the benefits flow toward polarization rather than
> equalization.  That however is not the fault of the theory of comaparative
> advantage, but faulty valuation.
>
> Even in equity trading, sophisticated portfolio management often dictates sale of
> certain issues not because the trader is shorting them, but the anticipated
> restructuring of the portfolio mix enhances its overall value or reduces its value
> at risk (VAR).
>
> Economists tend to underestimate the effect of the rule that there is always "a
> scheme behind a scheme" in decision making.
>
> Henry C.K. Liu

--
Warren Mosler
Director of Economic Analysis
III Finance

http://www.warrenmosler.com