It is always tempting to suppose that the ability to export a good depends on your country having an absolute advantage in productivity. But an absolute productivity advantage over other countries in producing a good is neither a necessary nor a sufficient condition for having a comparative advantage in that good. In our one – factor model the reason why absolute productivity advantage in an industry is neither necessary nor sufficient to yield competitive advantage is clear: the comparative advantage of an industry depends not only on its productivity relative to the foreign industry, but also on the domestic wage rate relative to the foreign wage rate. A country’s wage rate, in turn, depends on relative productivity in its other industries. In our numerical example, foreign is less efficient than home in the manufacture of wine, but at even a greater relative productivity disadvantage in cheese. Because of its overall lower productivity, foreign must pay lower wage that home, sufficiently lower that it ends up with lower costs in wine production. Similarly, in the real world, Portugal has low productivity in producing, say, clothing as compared with the united states, but because portugal’s productivity disadvantage is even greater in other industries it pays low enough wages to have a comparative advantage in clothing all the same.
But isn’t a competitive advantage based on low wage somehow unfair? Many people think so; their beliefs are summarized by our second misconception.