Comparison Between Krugman's 'Elephant And The Blind Men'

......BUT IT IS NOT!

“Elephant and the blind men". Jain Stories, says: “ All of you are right. The reason every one of you is telling it differently is because each one of you touched the different part of the elephant. So, actually the elephant has all the features you mentioned” . If we bring trade into this picture and observe all theories, they are like parts of Elephants body. Each theory explains one aspect of truth. Adam smith explaining the absolute advantage through division of labour.Ricardo explaining the aspect of relative profit drawn out of trade, the comparative cost advantage though the concept of opportunity cost. Hecksher-ohlin introducing the concept of factor specialization, how each factor builds onto give us a specific

In ricardos model there are constant returns to scale. Krugman explains with the help of technology and specialization how increasing returns to scale with the economies of scale gives rise to Horizontal intra industry trade. If we assumed increasing returns in explaining comparative advantage it would simply alter the theory.

Their hasbeen a further development proposed by Marc Melitz emphasizing. firm level differences in the same industry of the same country.[6] It stresses on the importance of firms rather than sectors in understanding the challenges and the opportunities countries face in the age of globalization. This is known as the NEW NEW TRADE THEORY.

As international trade is increasingly liberalized, industries of comparative advantage are expected to expand, while those of comparative disadvantage are expected to shrink, leading to an uneven spatial distribution of the corresponding economic activities. Within the very same industry, some firms are not able to cope with international competition while others thrive. The resulting intra-industry reallocations of market shares and productive resources are much more pronounced than inter-industry reallocations driven by comparative