The Recardian theory of comparative advantage between South Africa and the USA in the manufacturing sector

22 Jan 2009

This study focuses on the Ricardian model of comparative advantage with one factor of production and two countries, but in a multi-goods dimension. This is used to explain the pattern of trade that exists between South Africa and the United States’s manufacturing industries. The empirical test of the Ricardian model is carried out using a panel data approach on 23 manufacturing industries. The estimations were performed using both a one-way and two-way error component model and a stationary panel technique were applied to the equations. The advantages of progressing from cross-sectional estimations to a panel data estimation technique is that the efficiency of estimating the parameters will be improved. It also gives more informative data, more variability, less collinearity, more degrees of freedom and the effect of omitted variable bias is reduced. The results show that the pattern of trade between South Africa and the United States conforms to the Ricardian theorem.