Government, trade and comparative advantage, revisited

This study conducts a detailed analysis of the production possibility frontier (PPF) in an economy with two goods, each produced using labour and a specific factor as inputs, and public infrastructure, which has positive externalities on the production of each good. We show that if the elasticity of a specific factor input into production is sufficiently small, the PPF has a concave–convex–concave shape. Although our model is similar to the one developed in 1992 by Richard H. Clarida and Ronald Findlay, this possibility was overlooked in their analysis and it can generate trade patterns that are against the law of comparative advantage. Nevertheless, trade is always gainful and, as in the existing studies, trade openness increases the provision of public infrastructure in a country exporting goods whose productivity is highly dependent on infrastructure. We also examine the relationship between factor endowments and comparative advantage.