Trade intermediates and natural resources

Once international trade in more than final consumer goods is allowed, basic notions of comparative advantage need to be re-examined. We have already discussed the limitations in a multi-commodity word of comparing autarky prices in two countries to predict item-by-item the pattern of trade; generally only correlations can be made except under additional assumptions. With trade in intermediates allowed, the problems in predicting trade in final goods became even greater. As MakKenzie (1945) remarked in one of his classic problem on the Ricardian model, the familiar nineteenth century trade pattern in which Lancashire produced and exported cotton textiles would most probably not have been observed if England had had to grow its own cotton . We shall have occasion both in this section and to revert to this theme: the pattern of trade in final goods may not be readily deducible from the comparison of pre-trade relative prices in these markets.[3]