comparative advantage

• Comparative Advantage

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Protectionism - Criticisms of the Theory of Comparative Advantage as a basis for trade policy

1 According to Britannica.com, The theory of comparative advantage provides a strong

argument in favour of free trade and specialization among countries. The issue

becomes much more complex, however, as the theory’s simplifying assumptions—a single

factor of production, a given stock of resources, full employment, and a balanced exchange of

goods—are replaced by more-realistic parameters.

http://www.britannica.com/EBchecked/topic/129613/comparative-advantage


Protectionism - Criticisms of the Theory of Comparative Advantage as a basis for trade policy

1 Herman Daly, a leading voice in the discipline of ecological economics, emphasizes that although Ricardo's theory of comparative

advantage is one of the most elegant theories in economics, its application to the present day is illogical: Free capital mobility

totally undercuts Ricardo's comparative advantage argument for free trade in goods,

because that argument is explicitly and essentially premised on capital (and other factors) being immobile between nations


Comparative advantage

1 In economics, 'comparative advantage' refers to the ability of a party to produce a particular

good or service at a lower Marginal cost|marginal and opportunity cost over another. Even if one country is more efficient in the

production of all goods (absolute advantage in all goods) than the other, both countries will still gain by trading with each other, as long as they

have different relative efficiencies.'Baumol, William J. and Alan S. Binder, 'Economics:

Principles and Policy, . 2009.


Comparative advantage

1 The more-efficient country has a comparative advantage in shoes, so it can gain in efficiency by moving

some workers from shirt-production to shoe-production and trading some

shoes for shirts


Comparative advantage - Origins of the theory

1 The conclusion drawn is that each country can gain by specializing in the good where it has comparative

advantage, and trading that good for the other.


Comparative advantage - Modern Theories

1 Ricardian theory was formulated in Jones' 1961 paper,Richard Jones, Comparative Advantage and the

Theory Tariffs: A Multi-country, Multi-commodity Model, Review of

Economic Studies, Nomber 77, pages 161-175, June 1961


Comparative advantage - Effect of trade costs

1 Trade costs, particularly transportation, reduce and may

eliminate the benefits from trade, including comparative advantage. Paul Krugman gives the following example., Paul Krugman, February

21, 2010


Comparative advantage - Effect of trade costs

1 Krugman proceeds to argue more speculatively that changes in the cost of

trade (particularly transportation) relative to the cost of production may be a factor in changes in global patterns of trade; if trade costs decrease, such as

with the advent of steam-powered shipping, trade should be expected to

increase, as more comparative advantages in production can be realized


Comparative advantage - Effects on the economy

1 Conditions that maximize comparative advantage do not automatically resolve trade deficits. In fact, many real world

examples where comparative advantage is attainable may require a trade deficit. For example, the amount of goods produced

can be maximized, yet it may involve a net transfer of wealth from one country to the

other, often because economic agents have widely different rates of saving.


Comparative advantage - Effects on the economy

1 As the markets change over time, the ratio of goods produced by one country versus another variously changes while maintaining the

benefits of comparative advantage. This can cause national currencies to

accumulate into bank deposits in foreign countries where a separate

currency is used.


Comparative advantage - Development economics

1 Further, they argue that comparative advantage, as stated, is a static

theory – it does not account for the possibility of advantage changing through investment or economic development, and thus does not provide guidance for long-term

economic development.


Comparative advantage - Development economics

1 Today trade policy tends to focus more on competitive advantage as opposed to

comparative advantage


Comparative advantage - Free mobility of capital in a globalized world

1 Some scholars, notably Herman Daly, an American ecological economist

and professor at the School of Public Policy of the University of Maryland,

have voiced concern over the applicability of Ricardo's theory of

comparative advantage in light of a perceived increase in the mobility of

capital:



1 International trade (governed by comparative advantage) becomes, with the introduction of free capital

mobility, interregional trade (governed by absolute advantage).



1 The moment the model expands from one good to multiple goods, the absolute may turn to a comparative

advantage


Comparative advantage - Criticism

1 For example, according to the comparative advantage principle,

developing countries with a comparative advantage in agriculture

should continue to specialize in agriculture and import high-

technology widgets from developed countries with a comparative advantage in high technology


David Ricardo - Comparative advantage

1 He argued there is mutual benefit from international trade even if one party is more competitive in every

possible area than its trading counterpart and that a nation should concentrate on sectors where it had

a comparative advantage while engaging in international trade in order to acquire those products in

which it does not have a comparative advantage.


David Ricardo - Comparative advantage

1 Ricardo's theory of comparative advantage attempted to prove, using

a simple numerical example, that international trade is always

beneficial.Ricardo, David (1817) On the Principles of Political Economy

and Taxation


Ricardian economics - Comparative advantage

1 With perfect competition and undistorted markets, countries tend to export goods in which they have a

comparative advantage.


Ricardian economics - Comparative advantage

1 According to The Fortune Encyclopedia of Economics, Ricardo's idea of comparative advantage is the

main basis for most economists' belief in free trade today (827).


Capital mobility - Capital mobility and comparative advantage

1 Capital mobility and the competitive drive for the highest return on

investment would give all countries identical relative abundances for new investment, eliminating comparative

advantage and trade.



1 Other conceptions of comparative advantage are sound in all instances where the factors of production not homogenous between the parties notwithstanding mobility factors.



1 Given the liberalization of capital flows under free trade agreements of

the 1990s, the condition of capital immobility no longer holds. David Korten argues that the theory of

comparative advantage is replaced by that of downward levelling.

However, capital immobility is only one route to comparative advantage,

useful to basic models, but not essential to it.



1 Basic models assuming capital immobility were convenient and not essential to the principle. Although greater capital mobility is likely to reduce comparative advantage,

barriers to capital flows are not the only way to derive it.



1 * Early qualitative property|qualitative descriptions of the

principle were based on the greater ease of producing different

commodity|commodities in one country than another, and not on capital mobility. The comparative

advantage of France over Iceland in wine production is not based on

capital immobility.https://store.theartofservice.com/the-comparative-advantage-toolkit.html


1 * Comparative advantage can be derived from more complicated

models including capital mobility (i.e., international borrowing, lending, and labor movement) and often posit movement of capital as analogous to

the movement of goods.


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