Static and Dynamic Comparative Advantage: A Multi-Period Analysis with Declining Terms of Trade

THERE IS NO BODY OF ECONOMIC THEORY THAT HAS ACHIEVED GREATER PROFESSIONAL ACCEPTANCE THAN DAVID RICARDO'S THEORY OF COMPARATIVE ADVANTAGE AND THE MODERN EMENDATIONS OF RICARDO'S "LAW." THIS ARTICLE ARGUES THAT IT IS POSSIBLE TO DEMONSTRATE THAT THE BASIC RICARDIAN THEORY OF COMPARATIVE ADVANTAGE IS TOO STATIC A THEORY ON WHICH TO REST A FIRST-BEST ARGUMENT IN FAVOR OF FREE TRADE IN QUITE A NUMBER OF REALISTIC SCENARIES. IT SHOWS THAT THE GENERALIZED ARGUMENT IN FAVOR OF FREE TRADE POLICY DERIVED FROM TRADE THEORY CANNOT BE SUSTAINED ONCE ONE TAKES THE LONG-TERM HISTORICAL TREND OF THE TERMS OF TRADE INTO CONSIDERATION.