Does trade flow between Turkey and Germany justifies ricardian theory?

Abstract

—Classical Ricardian theory of comparative advantage states that differences in labor productivities determine trade patterns. Many publications have focused on labor productivity differences as an important variable in determination of trade flows among countries. However few studies focused on both productivity and labor cost differences and their effects on countries’ export performance. Unit labor cost (ULC) combines the effects of productivity, labor cost and exchange rate. An increase in ULC implies that labor costs rise more than productivity gains. As a result, comparative advantage deteriorates. The aim of this study is to contribute validity of classical model by inquiring the effect of relative unit labor cost (RULC) in determination of trade flows between Turkey and Germany. We used annual Turkish and German data for the period of 2002 to 2008 for five major manufacturing sectors which are food and beverages, tobacco products, textiles, wearing apparel, leather and leather products. Export and import data are obtained from TurkStat. The ULC data set are calculated by using UNIDO value added and wage data set. The estimation results show that Ricardian theory explains trade pattern between Turkey and Germany. Increase in relative unit cost in Turkey effects relative export performance of Turkey negatively