A Direct Test of the Theory of Comparative Advantage: The Case of Japan

Abstract

We exploitJapan's sudden and complete opening up to international trade in the 1860s to test the empirical validity of one of the oldest and most fundamental propositions in economics: the theory of comparative advantage. Historical evidence supports the assertion that the characteristics of the Japanese economy at the time were compatible with the key assumptions of the neoclassical trade model. Using detailed product-specific data on autarky prices and trade flows, we find that the autarky price value of Japan's trade is negative for each year of the period 1868-75. This confirms the prediction of the theory. I. 'Independently of Deardorff, Dixit and Norman (1980, pp. 94-96) derived the same result. However, their analysis was not formulated and developed as thoroughly as Deardorff's. 2 While under autarky the economy's production point coincides with its consumption point (x" = c"), international trade allows the production point xJ to be distinct from the consumption point c1. In fig. 1, the economy has a comparative advantage in good 2 (or the slope of the production possibility frontier at xf is flatter than at x"). This implies that the economy's trade vector evaluated at autarky prices is negative, or p"T< 0. 3 The insight that prices contain the relevant information about underlying economic fundamentals goes back to the pioneering work of Hayek (1945).

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