Maximizing Regional Welfare: Ex-ante Determination of Comparatively Advantageous Goods for Specialization in East Asia

Abstract

David Ricardos comparative advantage theory provides a widely accepted rationale behind international trade: international trade arises from country-specific differences in factor endowments and technological differences in commodity production, giving rise to a positive-sum game. Provided that the trade patterns dictated by comparative advantage indeed produce maximal welfare for the participants of international trade, it would prove to be highly beneficial to extrapolate on the theory to predict the optimal trade pattern of the world we live in today. In the face of the limitations of the Ricardian theory, whose application is constrained to a two-country, two-country model, this paper attempts to generalize the theory so as to widen its applicability to a multi-country, multi-commodity model that is commensurate with the status quo. This paper also attempts to derive a welfare-maximizing trade export portfolio for East Asia, which faces burgeoning economic integration driven by free trade agreements and production sharing.