Economic question on comparative advantage +...

[mr friendly guy]

Ok obviously I wasn't going to fit the question in the title, but this economic concept is bugging me, and I am hoping more knowledgeable members can shed some light on the matter. And please keep it on topic and no rants against outsourcing unless relevant to the question I am actually asking.

First I want to talk about comparative advantage

To put it in simple terms, lets compare 2 countries, the US and Australia. Even if the US can produce goods A and B more efficiently than Australia, in a lot of situations because of different opportunity cost, it may be more efficient for the US to concentrate on producing goods A and let Australia concentrate on good B. What will happen is that the total number of either good produce will be greater if each country specialised, compared to if each country tried to produce both goods. Obviously both countries need the other goods and trade is born.

Now onto the second point. Given this, and with concepts of outsourcing, its more efficient for some countries with lower labour costs to produce certain "lower value goods". The obvious example is China, particularly in the 80s, 90s, and maybe the early 2000s.

The third point. One of the weaknesses of the Soviet System is that it tended to focus in on heavy machinery, but ignored some of these lower value consumer goods. Niall Ferguson illustrates this with the example of how jeans were banned in Eastern bloc countries, and for presumably the above reason they were unable to produce jeans in high quantities.

So given these three points, why is the Soviet inability to produce lower value consumer goods considered bad, when under a comparative advantage system, it predicts such goods should be produced by a third country like China anyway?

I am sure I am missing something, but I might need some help to see it.

[Simon_Jester]

Because the Soviet system was closed, not open.

In a world where countries trade with each other, my making a huge surplus of what I'm good at works. My country excels at making wine, yours excels at making wool, so I trade you wine for wool, and we both make a lot of what we're good at. Everyone has wine with dinner and a warm coat, all is well.

But by and large, the USSR was not big on relying on trade with foreign nations (this might not include nations in the Soviet bloc, but definitely included China for much of its history). So it couldn't trade mining equipment for blue jeans the way a country plugged into a network of international trade could.

[Guardsman Bass]

It's also not necessarily clear that the Soviet Union was "good" at producing heavy machinery in terms of comparative advantage. The government allocated a ton of resources towards producing it as opposed to consumer goods or other products, but that doesn't mean they had a comparative advantage in it in terms of trade.

[mr friendly guy]

It's also not necessarily clear that the Soviet Union was "good" at producing heavy machinery in terms of comparative advantage. The government allocated a ton of resources towards producing it as opposed to consumer goods or other products, but that doesn't mean they had a comparative advantage in it in terms of trade.

Your implication is that they might have been better at producing consumer goods but they didn't try it. I suppose it may be true in the beginning, but surely as they concentrated on heavy machinery, their skills with consumer goods must have atrophied (lack of knowledgeable workers and all that as these workers are employed in other industries). So after one generation I would have thought they would have a comparative advantage in heavy machinery simply because their ability to produce consumer goods would be so crap.

[Purple]

So after one generation I would have thought they would have a comparative advantage in heavy machinery simply because their ability to produce consumer goods would be so crap.

comparative advantage != we can do X better than we can do Y.
comparative advantage = We can do X better than others can do X.

You can have an economy completely focused on making something and still suck at it compared to others.

[Surlethe]

You have it backwards, Purple. Absolute advantage is "we do X better than others do X." Comparative advantage is "we do X better than we do Y" --- it measures the tradeoff a nation faces between producing different types of goods. When you have free trade, it always pays for a nation (or a person!) to produce what they're better at, with no regard for what anybody else is good at. Then they trade their surplus for more of the other stuff than they would have been able to produce, and end up beyond their own production possibilities frontier.

This is why Simon nailed the point: even if the Soviets had a comparative advantage in heavy machinery, they were still poorer than they could have been because they didn't trade their heavy machinery for light durables manufactured in other countries.

[Purple]

You have it backwards, Purple. Absolute advantage is "we do X better than others do X." Comparative advantage is "we do X better than we do Y" --- it measures the tradeoff a nation faces between producing different types of goods. When you have free trade, it always pays for a nation (or a person!) to produce what they're better at, with no regard for what anybody else is good at. Then they trade their surplus for more of the other stuff than they would have been able to produce, and end up beyond their own production possibilities frontier.

This is why Simon nailed the point: even if the Soviets had a comparative advantage in heavy machinery, they were still poorer than they could have been because they didn't trade their heavy machinery for light durables manufactured in other countries.

My bad. That's why I should not post before the morning coffee.

[Surlethe]

Just because I wanted to work it out, here's an ...

Econ 101 Example

To illustrate the difference between absolute and comparative advantage, consider (say) a small Southern Pacific island with 10 acres of land. It can use that land to produce 1000 bushels of wheat, or it can use the land to build a small factory that produces 100 tractors per year. Across the ocean, there is a big country that has 1 billion acres of land. Every hundred acres can be used to produce 10,000 bushels of wheat or 5,000 tractors per year (due to economies of scale).

Observe that the small island has NO absolute advantage. It can never, by itself, make more than 1,000 bushels of wheat, or 100 tractors per year. It will always be poor (in an absolute sense). The big country can make 1 trillion bushels of wheat or 50 billion tractors, or many combinations in between. It will always be richer than the island.

However, to cost to the island of producing 100 more tractors is 1000 bushels of wheat. The cost to the big country of producing 100 more tractors is a 200 bushels of wheat (5000/100 = 50/1 = 100/2, so it takes 2 acres to make 100 more tractors, giving up (10000/100)2 = 200 bushels of wheat). Conversely, to produce 1000 more bushels of wheat, the island gives up 100 tractors, while to produce 1000 more bushels of wheat, the big country gives up 500 tractors. So the island has a comparative advantage in wheat, while the big country has a comparative advantage in tractors.

So what strategy should the island pursue? It should produce wheat, since it would give up more wheat to produce tractors than the big country. Observe that if it negotiates a price between 2 bushels per tractor and 10 bushels per tractor, the island can trade some of its wheat for tractors produced by the big country. Say, for example, the island trades 100 bushels of wheat for 20 tractor. Now the island has 900 bushels of wheat and 20 tractors. To make 20 tractors by itself, the island would have had to give up 200 bushels of wheat: after trade, although it is still much, much poorer than the big country, the island is still wealthier than it would otherwise have been!

[Surlethe]

To round up the lesson, here is an article describing an empirical study quantifying gains to the US from trade with China.

[mr friendly guy]

To round up the lesson, here is an article describing an empirical study quantifying gains to the US from trade with China.

It says you need to be a subscriber to view the article. If you are not allowed to post it publicly on the message board, perhaps you could PM it to anyone who wants to read it.

[Surlethe]

Huh. I could read it all the way when I got there through Google, but now I can't. Try opening an incognito window in Chrome and googling the first paragraph of the article.

[Blayne]

The Soviet Union and most Eastern bloc countries were organized into the Comecon which was meant to be a international regime for facilitating trade between Communist countries such as by fixing prices for goods exchanged. However because the way it attempted to facilitate trade between Comecon countries wasn't technocratic nor transnational (as in, there wasn't a body that could tell the USSR what to do, the USSR wanted it to tell the other countries what to do) there wasn't a lot of trust that other countries would make do on promised goods and services. So Comecon countries, according to the article tended towards autarky instead of open trade between each other.

For example (according to the link) the Czech's designed an extremely innovative and reliable subway car system that could be used both above and underground and was allegedly better than the ones used in the New York City subways, but because of the way the Comecon was handled the Czech's had to use relatively terrible russian ones instead.

The Soviets I think viewed trade as a means to an end, as a political tool not as a means to increase wealth; since the goal was to make your country more powerful than other countries in absolute terms.

[Surlethe]

I recall from Global Capitalism, by Frieden, that the communist bloc engaged in very little interstate trade. The little trade that happened was directed international bartering, rather than mediated by private international markets. If anybody wants I can look up the relevant chapter and footnotes.

[Guardsman Bass]

Your implication is that they might have been better at producing consumer goods but they didn't try it. I suppose it may be true in the beginning, but surely as they concentrated on heavy machinery, their skills with consumer goods must have atrophied (lack of knowledgeable workers and all that as these workers are employed in other industries). So after one generation I would have thought they would have a comparative advantage in heavy machinery simply because their ability to produce consumer goods would be so crap.

That's certainly possible, although it doesn't necessarily mean they would have a comparative advantage in producing heavy machinery either in trading with other countries. The Soviet Union also produced and exported agricultural goods and natural resources in large quantities (particularly oil). I suspect, but can't prove, that if they hadn't gone communist, their comparative advantage probably would have been in those two areas, at least at first.

Huh. I could read it all the way when I got there through Google, but now I can't. Try opening an incognito window in Chrome and googling the first paragraph of the article.

You'll definitely have to google the title. WSJ.com lets you view a certain number of articles through Google for free before the paywall kicks, although you can always re-set it by deleting their cookies.

I remember reading that interesting article a while back. Areas that produced products in direct competition with China tended to suffer job losses both from the loss of manufacturing jobs plus the "add-on" jobs they created, and so they were recipients of substantial amounts of transfer payments. Which isn't too surprising, particularly if you think of the transfer payments as form of "side payment" to ease the pain of economic change. Trade still ended up being a net positive over all.

I recall from Global Capitalism, by Frieden, that the communist bloc engaged in very little interstate trade. The little trade that happened was directed international bartering, rather than mediated by private international markets. If anybody wants I can look up the relevant chapter and footnotes.

I thought oil exports were the Soviet Union's main way of getting hard currency. Feel free to correct me if I'm wrong on that - I thought they traded oil for currency, then used the currency to buy certain kinds of foreign products (particularly agricultural products in the latter years of the Soviet Union).

[Surlethe]

They may have. I mean trade within the communist bloc, rather than trade between the USSR and western nations.

[Simon_Jester]

This is why Simon nailed the point: even if the Soviets had a comparative advantage in heavy machinery, they were still poorer than they could have been because they didn't trade their heavy machinery for light durables manufactured in other countries.

It might have all worked out for the best anyway if they'd balanced their economy differently- the Soviet system could have done a lot better than it did.

What really choked them on this was the Stalinist-era fixation on "industrialization" as "build big heavy-metal projects and electrification." That's totally valid as a 19th century model, because in large part the 19th century was about nations becoming economically powerful by building infrastructure: railroads, steel mills, canals, and so on. But by the 1950s the USSR was adequate in those areas, and it really started to fall behind in other areas, things that the capitalist countries prioritized in the mid-20th century.

For example, speed of delivery and reliable supplies- Soviet goods were often available in limited quantities, creating long lines and waiting lists. In most other countries supply matched demand more closely, which saved time and effort and kept people happier. Likewise, quality of electronics- the Soviet hierarchy seemed to view computers specifically as machines to perform calculations, not as machines to stimulate the flow of information from one place to another. Well before the Internet became any kind of serious known thing, American business and military organizations were getting a lot of mileage out of computerized databases and communication networks. The Soviets... my impression is that they got less out of that.

In a different country not run by Leonid Brezhnev and a clique of paranoid generals and factory planners, the Soviets might have been able to pull themselves together and reorganize their command economy into something that could at least keep the nation running in a happy functional way through the 20th century. But instead they labored under a burden of obsolete ideas and sheer militarism that would have crushed any economy, let alone a command economy, sooner or later.

[Blayne]

Didn't Stas point out that without the heavy industrialization the Soviet Union's/Russia's "natural" level of development would've been that of a resource extraction based second world nation? That without the the heavy overindustrialization Russia and FSU countries would have a much lower standard of living than they do now (or then) and be something more comparable to the Philipines?

The USSR is/was a large country with a growing population, it has plenty of valid reasons for the massive production of steel, cement, electrical wiring and so on especially if they had say Japan's or Britain rates of Urbanization. You need those things for urbanization and the its maintanance. I agree that Brezhnev was probably the worst of all Soviet leaders and that they probably in a would've/could've/should've situation got a lot of mileage out of letting the Kosygin reforms run their course.

I think your underestimating the long term importance of infrastructure on the economy, a lot of what you prioritize as something that would help the USSR is stuff that they could've gotten with hybridizing their command economy to be more on the Deng Xiaopeng model and let the private sector handle that with defense-industrial complex taking from it their perogatives. It could in theory build itself on top of/expand from the state invested infrastructure. Which would be pretty neat hypothetically to watch the information age come to the Soviet Union, since all of the black fiber would've been state mandated and laid down so private corporations wishing to use it would have to abide by state regulations* in ways not entirely existing with precedent anywhere else.

I would like to also point out that the Soviet Army was arguably the best performing part of the Soviet economy, if only because it had a direct competitor to prevent stagnation, which is probably what helped to keep the whole thing going for so long (;¬_¬)...

*A close approximation is the state granted monopolies/subsidies governments give to the cable companies but I don't think its the same and would be a curious thing to watch to see how they did things differently.

[Guardsman Bass]

In a different country not run by Leonid Brezhnev and a clique of paranoid generals and factory planners, the Soviets might have been able to pull themselves together and reorganize their command economy into something that could at least keep the nation running in a happy functional way through the 20th century. But instead they labored under a burden of obsolete ideas and sheer militarism that would have crushed any economy, let alone a command economy, sooner or later.

If it weren't for the geopolitical rivalry that colored everything (plus the massive burden of its military budget), they probably could have tried the Chinese economic liberalization route: special trade zones, legalization of entrepreneurship at the smaller level, more competitiveness for the state enterprises (like letting them sell their excess stuff for whatever they can get), and turning the agricultural sector into a market-oriented one (such as letting the collective farms break up and/or sell their excess food and products for a free-floating price). Soviet labor was never as cheap as Chinese labor, but they did have a highly educated workforce, including a lot of professionals who could work at a fraction of the price of what they cost in the US and other richer nations.

Didn't Stas point out that without the heavy industrialization the Soviet Union's/Russia's "natural" level of development would've been that of a resource extraction based second world nation? That without the the heavy overindustrialization Russia and FSU countries would have a much lower standard of living than they do now (or then) and be something more comparable to the Philipines?

I'm not sure I buy that in the long term. Sure, Russia was poor, rich in natural resources, and had a low population density (overall), but there were other countries in the early twentieth century that were still heavily tied to natural resources and/or agricultural production, such as Australia and Canada, and they developed into First World countries. Moreover, the Russians had two things that the US had in the 19th century that eventually helped it to develop and industrialize: a large internal population to serve as a market, and some highly lucrative exports to bring capital into the country. In fact, their internal population was big enough that they probably could have made Import-Substituting Industrialization work for a few decades, especially if they used their currency earnings from oil and natural resource exports to trade for capital goods and technology.

[Blayne]

Canada and Russia are only similar in that the fur trade spurred exploration and eventual settlement of our hinterlands, Russia's river system didn't make Russia as easy to facilitate trade and the growth of a manufacturing base (Russia's rivers make it easy to go from the north to the south, the St Lawrence made east-west easier). Their status as dominions, a relative lack of external threats, immigration of skilled labour, easier time transfering technology all of this contributes to vastly different situations that don't make them easily comparable.

I agree its true that Russia would have industrialized sure, it was clear even in the 1860's under the Tsar's that Russia was/could industrializing, but the syndrome of "Dutch Disease" and looking at Russia today it's clear that this industrialization would have hit a snag wherein the economy of the country finds it preferable to focus on resource extraction, which traditionally tends to not result in the growth of infrastructure or public benefit and to the stagnation and specialization of the economy away from a diversified manufacturing center. In short that without the heavy top-town industrialization it would have plateaued and reach a relative peak where any growth only contributes to a widening gap in the gini coefficient, because resource extraction and its damaging effects to currency harming its exports of manufacturies making the country rely on imports from other countries; rinse and repeat until the manufacturing sector shrinks and continues to become more primitive. This is without a concious desire and effort by the government to keep resource extraction in use to pay for improvements and expansion of solid infrastructure projects; like bridges, railroads and education.

[Simon_Jester]

Didn't Stas point out that without the heavy industrialization the Soviet Union's/Russia's "natural" level of development would've been that of a resource extraction based second world nation? That without the the heavy overindustrialization Russia and FSU countries would have a much lower standard of living than they do now (or then) and be something more comparable to the Philipines?

The trick is that they didn't time the transition right- too slow to permit the people as a whole to reap the rewards of all that industrialization, with too much of the goods going to the huge military machine.

By the 1970s, Soviet industrialization and urbanization were going well; this would have been a great time for them to make the shift towards a more... 'butter' economy, in the sense of 'guns versus butter' or possibly 'guns versus butter versus drill presses.'

I think your underestimating the long term importance of infrastructure on the economy...

It's huge, but you can't spend 70% of GDP or whatever on building up infrastructure and tanks and ICBMs indefinitely. Or rather, you shouldn't; it's bad for the general public and it's bad for the long-term health of your economy because it promotes stagnation.

I would like to also point out that the Soviet Army was arguably the best performing part of the Soviet economy, if only because it had a direct competitor to prevent stagnation, which is probably what helped to keep the whole thing going for so long (;¬_¬)...

That's kind of the problem. The Soviet Army was huge and expensive and didn't produce anything, except arguably 'security' (adequately provided by the nuclear deterrent). As far as a national peacetime economy is concerned, the military is little more than a hole you pour money into, unless you're explicitly using it to stimulate employment, and I doubt there was a serious shortage of civilian jobs in the USSR.

And the economic share of the USSR's assets that went to the armed forces also helped give the armed forces exaggerated peacetime political power, which further promoted the ineffiency of the system since so many of the people running it were generals who were vested into the military-industrial complex.

If the US spent something like the same share of GDP on the military-industrial complex, and gave them as much direct say in domestic politics, it would probably be about as messed up as the USSR got.

[Surlethe]

By the 1970s, Soviet industrialization and urbanization were going well; this would have been a great time for them to make the shift towards a more... 'butter' economy, in the sense of 'guns versus butter' or possibly 'guns versus butter versus drill presses.'

Actually, the Soviet - and entire communist bloc - "butter economy" grew by leaps and bounds during the 1950s and 1960s. Before the war, the USSR deprived its citizenry of consumption goods in order to industrialize. After the war, all of Eastern Europe was devastated, and in order to reindustrialize there was, again, very low consumption. Standards of living were necessarily low coming into the 1950s. At this point, the USSR shifted production away from capital goods and toward consumption goods, and living standards skyrocketed until they were competitive with Western living standards. There's a reason leftist movements in the West questioned the very idea of markets in a way they haven't since: through the 1950s and '60s, the experience of the communist bloc suggested central planning was actually a viable alternative to soft, market-oriented Western socialism.

It might have all worked out for the best anyway if they'd balanced their economy differently- the Soviet system could have done a lot better than it did.

Not likely. To perform significantly better than it did, the Soviet government would have had to make a highly improbable series of correct bets during the 1950s and 1960s on capital allocation and as-yet-unproven technology. Perhaps the particular composition of top leadership hastened its decline, but there's no reason to believe that enlightened technocrats would have made significantly better choices (unless they had chosen to decentralize). Once they had missed the first bets, their past choices continued to constrain their future options, until the era of stagnation (1% growth during the 1970s --- not 1%/yr, 1%/decade!) discredited central planning entirely.

[K. A. Pital]

Just because I wanted to work it out, here's an ...

Econ 101 Example

To illustrate the difference between absolute and comparative advantage, consider (say) a small Southern Pacific island with 10 acres of land. It can use that land to produce 1000 bushels of wheat, or it can use the land to build a small factory that produces 100 tractors per year. Across the ocean, there is a big country that has 1 billion acres of land. Every hundred acres can be used to produce 10,000 bushels of wheat or 5,000 tractors per year (due to economies of scale).

Observe that the small island has NO absolute advantage. It can never, by itself, make more than 1,000 bushels of wheat, or 100 tractors per year. It will always be poor (in an absolute sense). The big country can make 1 trillion bushels of wheat or 50 billion tractors, or many combinations in between. It will always be richer than the island.

However, to cost to the island of producing 100 more tractors is 1000 bushels of wheat. The cost to the big country of producing 100 more tractors is a 200 bushels of wheat (5000/100 = 50/1 = 100/2, so it takes 2 acres to make 100 more tractors, giving up (10000/100)2 = 200 bushels of wheat). Conversely, to produce 1000 more bushels of wheat, the island gives up 100 tractors, while to produce 1000 more bushels of wheat, the big country gives up 500 tractors. So the island has a comparative advantage in wheat, while the big country has a comparative advantage in tractors.

So what strategy should the island pursue? It should produce wheat, since it would give up more wheat to produce tractors than the big country. Observe that if it negotiates a price between 2 bushels per tractor and 10 bushels per tractor, the island can trade some of its wheat for tractors produced by the big country. Say, for example, the island trades 100 bushels of wheat for 20 tractor. Now the island has 900 bushels of wheat and 20 tractors. To make 20 tractors by itself, the island would have had to give up 200 bushels of wheat: after trade, although it is still much, much poorer than the big country, the island is still wealthier than it would otherwise have been!

In the end, however, if or, shall we even say when prices for a cheap labour-intensive resource such as wheat change, or the tractor nation simply starts making wheat more efficiently, the small island will be crushed and its economy built entirely around the production and export of one primitive good will deteriorate and turn to hell. Like the downfall of Argentina, that can take several decades, or it can happen in mere years like a drastic shock.

That's how banana republics are made and kept where they are.

Sure, Russia was poor, rich in natural resources, and had a low population density (overall), but there were other countries in the early twentieth century that were still heavily tied to natural resources and/or agricultural production, such as Australia and Canada, and they developed into First World countries.

Canada's development was heavily tied with that of the USA. Not that Australia and Canada weren't First World countries at the beginning of XX century either. Japan is the best example of a nation which started lower than the USSR and ended up higher. But Japan with their incredible emphasis on heavy industry with electronics is also the perfect counterexample to the idea that selling raw resources or agriculture would get you anywhere.

Once they had missed the first bets, their past choices continued to constrain their future options, until the era of stagnation (1% growth during the 1970s --- not 1%/yr, 1%/decade!) discredited central planning entirely.

From 1966 to 1970 under Leonid Brezhnev the Gross National Product (GNP) grew at a rate of around 5.3 percent per year. Then during 1971 to 1975 the growth declined to an average of 3.7 percent per year. And after 1975 the GNP fell to a growth of between 2.6 and 2.7 percent per year.

I am pretty sure that while the growth was modest and lower even than First World nation growth considering moderation (which was around 3% at the time), it wasn't "1% per decade".

[Surlethe]

Tsk, tsk. I was remembering wrong. Here's the more precise statement, with source:

While China boomed, the Soviet Union stagnated. Soviet output per person grew 75 percent between 1958 and 1978, twice as quickly as China's; but in the subsequent ten years [1978-1988, not the 1970s as I had remembered], while China doubled its economic size, the Soviet economy grew by only 7%. Moscow could not ignore this, both for obvious economic reasons and because China was a major military adversary. The economic success of the rival to the east and its ever-closer ties to the Western capitalist world forced the Soviets to rethink their policy.

So: the stagnation was the 1980s, not the 1970s, and the USSR's economy grew on average 0.6%/yr, not 1% the entire decade.

In the end, however, if or, shall we even say when prices for a cheap labour-intensive resource such as wheat change, or the tractor nation simply starts making wheat more efficiently, the small island will be crushed and its economy built entirely around the production and export of one primitive good will deteriorate and turn to hell. Like the downfall of Argentina, that can take several decades, or it can happen in mere years like a drastic shock.

If the big country starts making wheat more efficiently, then the island's economy will deteriorate until it can build a factory and start making tractors to trade for wheat, or until it copies the big country's wheat-making techniques and regains a comparative advantage in wheat. The process of specializing isn't always easy, but at the end of the day every nation is wealthier when it has specialized.

[K. A. Pital]

So: the stagnation was the 1980s, not the 1970s, and the USSR's economy grew on average 0.6%/yr, not 1% the entire decade.

Actually the stagnation sort of started in the 70s, growth rates in 1973-1980 declined heavily compared to the excellent 1950-1965 or even the rather good 1966-1973. But they weren't negative for sure.

If the big country starts making wheat more efficiently, then the island's economy will deteriorate until it can build a factory and start making tractors to trade for wheat, or until it copies the big country's wheat-making techniques and regains a comparative advantage in wheat. The process of specializing isn't always easy, but at the end of the day every nation is wealthier when it has specialized.

Most real-world examples demonstrate that only very small nations (e.g. Saudi Arabia, Norway) can somehow progress having extreme specialization and little to none diversification (and even then with Norway the question is moot). And that for a certain period, which might sooner or later end. Larger nations that fail to diversify - fail overall. Argentina is a prime example of a nationwide failure where one of the key reasons the spectacular late-XIX century growth from agriculture and meat couldn't be sustained in the XX century, since Argentina failed to diversify and develop a heavy industry core.

Let's look at China, which started with a cheap-labour based mass-production of clothing and light industry products, diversified its industries to more resemble the gigantic industrial plants of S. Korea and Japan, and right now China produces an enormous array of very different goods, both consumption goods and capital goods (which, in turn, include not just one type of production machinery but dozens of machines suitable for any production sector from metallurgy to food production).

Either you diversify, or your one-shot wonder economy is not going to last. Sukharto's Indonesia in 1973-1996 reduced poverty from 40% to rather modest figures, based on agriculture and oil extraction. It seemed as if everything's doing fine but in 1997 the economy collapsed, the share of poor immediately shot up to almost the same number as in the early 1970s. Where's the point in that illusory wealth?

One could argue that if the world economy was a stable mechanism which always has growing demand for the comparative advantage good, and if it had a mechanism of compensation to certain nations for maldevelopment which could occur due to misdirected world market demand for a resource... then "every nation is wealthier when it has specialised".

At the end, however, all wealthy nations are heavily diversified economies deeply involved in the production of capital goods and most poor nations are primitive one-export-good economies or worse yet, primitive agriculture-only economies, failing to produce capital goods on their own.

[Guardsman Bass]

*snip*

It only changes the mix of trade if the big country's increased productivity in producing wheat increases the opportunity cost of not producing wheat while lowering the opportunity cost of not producing tractors. Meanwhile, something that lowers the opportunity cost of producing wheat in the big country could change the balance so that the opportunity cost of not producing tractors on island nation increases.

Argentina is a prime example of a nationwide failure where one of the key reasons the spectacular late-XIX century growth from agriculture and meat couldn't be sustained in the XX century, since Argentina failed to diversify and develop a heavy industry core.

I wouldn't call Argentina a "nationwide failure". Despite its issues with inflation and macro-economic stability, the country still has one of the highest household incomes in South America, and does have a well-developed manufacturing sector (even if most of its exports are commodities).

Moreover, Argentina's issues with development have more to do with a long history of political instability in the twentieth century than with the fact that its exports were and are primarily commodities (Australia is an example of an industrialized, first world country where the main exports are natural resources and products like wool). After the Great Depression and before the 1990s, its many regimes tended to be piss-poor at managing inflation in particular, particularly since they were constantly running up debts trying to buy civil peace with spending.

Let's look at China, which started with a cheap-labour based mass-production of clothing and light industry products, diversified its industries to more resemble the gigantic industrial plants of S. Korea and Japan, and right now China produces an enormous array of very different goods, both consumption goods and capital goods (which, in turn, include not just one type of production machinery but dozens of machines suitable for any production sector from metallurgy to food production).

China's sheer size and population allowed it to diversify even with very low labor productivity in the 1970s and 1980s, although it was already a diverse nation in terms of what it produced before then. That doesn't work with small countries, not unless their labor productivity is really high. Just look at "Foxconn City", with its 200,000+ workers. That's a tiny fraction of China's labor force, but it would be a huge fraction of the labor force of a country with only a few million people.

Either you diversify, or your one-shot wonder economy is not going to last. Sukharto's Indonesia in 1973-1996 reduced poverty from 40% to rather modest figures, based on agriculture and oil extraction. It seemed as if everything's doing fine but in 1997 the economy collapsed, the share of poor immediately shot up to almost the same number as in the early 1970s. Where's the point in that illusory wealth?

What makes you think it was illusory? I notice you mentioned the share of poor was the same as that of the early 1970s, which is not the same as them being as poor as they were in the early 1970s in terms of income.

In any case, the case example was an obviously simplified comparative advantage and trade model assuming the production of only two goods, and even in that, it's unlikely that the two countries would produce and trade one good to the complete exclusion of the other good. You just find a trade mix that will likely be wheat-heavy on the island side and tractor-heavy on the big country side.