The US’s Comparative Advantage

Inspired by a question from PGL about whether the US still has a comparative advantage in agricultural products, I have put together another trade-related table. The table provides a simple measure of where the US’s comparative advantages and disadvantages lie.

(Note: for a list of items in each end-use category, see this document.)

For each category of goods, the table divides exports by imports during the first three months of 2004 and 2005. So for example in 2005, total exports of $211.7 bn divided by total imports of $381.6 bn yield a ratio for all goods of 0.55. The total X/M ratio for the US fell from 2004, because the US’s imports grew by more (in $ terms) than its exports. Obviously, a surplus in any category would yield an X/M ratio greater than 1.00, and a deficit yields an X/M ratio less than one. During the first three months of this year, the US ran a deficit in every broad end-use category of goods.

In determining where the US has a comparative advantage, each category of goods should be compared to the overall ratio for total exports and imports. A reasonable definition of comparative advantage is when a category of goods has a better-than-average X/M ratio. By that definition the US has a comparative advantage in the production of those goods that have an X/M ratio that is higher than 0.58 in 2004, or 0.55.

So to answer PGL’s original question: yes, clearly the US still does have a substantial comparative advantage in the production of agricultural products, along with capital goods and industrial supplies. The US is currently running a deficit in all three categories, but that is simply because the US is importing so much of everything to satisfy the difference between its consumption and production. The US’s comparative advantage hasn’t changed as a result of its trade deficit, so as soon as individuals and/or the federal government in the US start spending less and saving more, we can expect trade surpluses to return in those categories.

Kash

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