No Comparative Advantage

27 Jan

The case for free trade is based on the principle of comparative advantage. For example, Indians “pay” for Snapchat (and, let’s say, allow it to repatriate the profits) because Americans are better at building it, and Indians are better at producing something else. The example doesn’t land. Indians could ban Snapchat, which would cause some Snapchat clone to emerge (since there is already demand for such a product), and keep the profits within the country. Would the product be as good as one with a global user base? Nearly; an overwhelming majority of the interactions are between users located in the same country. But what about opportunity cost? It is hard to imagine if a small number of Indians needed to build (copy) the clone can be more profitably employed elsewhere. Lastly, how about the quality? The software could be somewhat lower quality (refer to the assumption about cheap copying) though the company (assuming that it is winner-takes-all given network effects) is also spared many of the innovation costs (the cost of trying dud ideas that never make it to the product, for one). And there lies the economic argument for banning software.

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