Capital Goods and the Comparative Advantages Chain

In this article we study the effects of changes in income distribution on comparative costs and we show that the presence of capital goods dramatically affects the possibility of constructing a "chain of comparative advantages" that allows us to explain the direction of international trade. In particular, we show that i) autarky comparative costs are poor predictors of the pattern of specialization because, under the presence of imported capital goods, costs do not vary proportionally with the relative wage rate; ii) to ensure that "a single cut in the chain" allows the exported and imported goods to be separated, at most a single good can be used as an intermediate input and that, when capital is made up of heterogeneous goods, the chain of comparative advantages it may not even be well defined. iii) We also show that changes in the profit rate can alter the ordering of the links in the chain, even under conditions in which the chain is well defined for a constant profit rate (e.g. null); and, additionally, iv that) the plausibility that the comparative advantages chain requires multiple links for the same industry increases with the value of the profit rate.