Comparative Advantage and the Gains from Financial Trade: A Reappraisal

Authors: Morgan, Wyn¹; Snowden, Nicholas²

Source: The World Economy, Volume 30, Number 2, February 2007 , pp. 342-362(21)

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Abstract:

Emerging market crises have suggested that a national benefit-cost assessment of external financial liberalisation could well prove unfavourable. This paper re-examines the principle of comparative advantage in its application to financial trade to seek guidance on measures that might permit a fuller realisation of the potential benefits involved. Drawing a parallel with Balasubramanyam's work on the gains from FDI and international migration we distinguish between those arising in financial trade from the net transfer of capital, and those deriving from the contemporaneous exchange of financial claims or services of equivalent value. In the first interpretation a country's comparative advantage is manifested by its role in `intertemporal' trade (as a borrower or lender). Our alternative emphasis is on the contractual risk-return characteristics of the financial claims exchanged. This perspective is applied firstly to portfolio diversification gains arising from further international stock market integration. Secondly, price risk management for developing countries in international primary commodity trade is discussed. Both applications imply the need for significant institutional development but could realise approximately contemporaneous gains reminiscent both of those involved in merchandise trade and in the skills and product (or service) flows that Balasubramanyam has emphasised in relation to FDI and international migration.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1467-9701.2007.00886.x

Affiliations: 1: University of Nottingham and 2: Lancaster University

Publication date: 2007-02-01