Global economy
Paul Krugman (1953–)
1817 David Ricardo says that countries have comparative advantages due to physical factors.
1920s and 1930s Eli Heckscher and Bertil Ohlin argue that capital-abundant countries export capital-intensive goods.
1953 Wassily Leontief finds an empirical paradox: the US, a capital-abundant country, has relatively labor-intensive exports, in violation of existing trade theories.
1994 Gene Grossman and Elhanan Helpman analyze the politics of trade policy, examining the effect of lobbying on the level of protection given to firms.
Economists used to believe that nations traded with each other because they were different: tropical countries sold sugar to temperate countries, temperate ones exported wool. Some countries were better at producing certain things—they had a “comparative advantage” because of their weather or soil.
However, there is good reason to believe that this is not the whole story. In 1895, Catherine Evans from Dalton, Georgia, was visiting a friend and noticed a homemade bedspread. Inspired, she made a similar one and began to teach others. Soon, textile firms sprung up, creating a carpet industry that came to dominate the market. This contradicted the usual explanation of international trade, since Georgia has no comparative advantage for making carpet.
In 1979, US economist Paul Krugman proposed a new theory that allowed for the influence of accidents of history, such as an industry arising from a chance event in Georgia. He observed that a lot of trade goes on between similar economies. Production has economies of scale: the initial outlay for a car plant means that costs are lower the more cars are made. Either country could make cars, but once one starts, it builds up a cost advantage that is hard for the other to erode. So a region may end up dominating trade in a good due purely to quirks of history.
"Regions that for historical reason have a head start as centers of production will attract even more producers."
Paul Krugman