Globalization of Production and Absolute Advantage in a Classical Approach

Abstract

Trade in intermediate goods has grown in importance over the past decades. However, there is an apparent inability of trade theory to deal with it. A suitable place to look for an explanation is the classical theory, which puts emphasis in the circular aspect of production. This paper uses a classical-production framework, based on Sraffa’s contributions, to investigate the globalization of production. It presents a novel closure to the system of international prices based on given wage disparities. This novel closure emphasizes the relevance of absolute cost advantages in the determination of international prices and the geographical distribution of production.