The comparative advantage fallacy and a rule for convergence

The gains from trade argument is based on the principle of comparative advantage. However, this principle is predicated on “tacit” axioms, presenting an argument which supports a proposition different to the one it purports to prove. This paper presents an alternative treatment, using a leader-follower model to show that free trade can in fact accentuate differences and growth disparities between countries. More importantly, it argues that the follower economy can catch up with the leader economy only if the ratio between the income-elasticity of the follower country’s exports to the rest of the world and the income-elasticity of its imports is greater than the ratio between the induced productivity of the leader and that of the follower country. This is our rule for convergence.