• Comparative Advantage
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Protectionism - Criticisms of the Theory of Comparative Advantage as a basis
for trade policy
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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
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Protectionism - Criticisms of the Theory of Comparative Advantage as a basis
for trade policy
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
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Comparative advantage
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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.
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Comparative advantage
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
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Comparative advantage - Origins of the theory
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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.
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Comparative advantage - Modern Theories
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Ricardian theory was formulated in Jones'
1961 paper,Richard Jones, Comparative
Advantage and the Theory Tariffs: A Multicountry, Multi-commodity Model, Review
of Economic Studies, Nomber 77, pages
161-175, June 1961
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Comparative advantage - Effect of trade costs
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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
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Comparative advantage - Effect of trade costs
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
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Comparative advantage - Effects on the economy
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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.
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Comparative advantage - Effects on the economy
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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.
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Comparative advantage - Development economics
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.
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Comparative advantage - Development economics
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Today trade policy tends to focus more on
competitive advantage as opposed to
comparative advantage
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Comparative advantage - Free mobility of capital in a globalized world
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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:
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Comparative advantage - Free mobility of capital in a globalized world
International trade (governed by
comparative advantage) becomes, with
the introduction of free capital mobility,
interregional trade (governed by
absolute advantage).
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Comparative advantage - Free mobility of capital in a globalized world
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The moment the model expands from one
good to multiple goods, the absolute may
turn to a comparative advantage
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Comparative advantage - Criticism
For example, according to the
comparative advantage principle,
developing countries with a
comparative advantage in agriculture
should continue to specialize in
agriculture and import hightechnology widgets from developed
countries with a comparative
advantage in high technology
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David Ricardo - Comparative advantage
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
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David Ricardo - Comparative advantage
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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
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Ricardian economics - Comparative advantage
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With perfect competition and undistorted
markets, countries tend to export goods in
which they have a comparative advantage.
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Ricardian economics - Comparative advantage
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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).
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Capital mobility - Capital mobility and comparative advantage
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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.
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Capital mobility - Capital mobility and comparative advantage
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Other conceptions of comparative
advantage are sound in all instances
where the factors of production not
homogenous between the parties
notwithstanding mobility factors.
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Capital mobility - Capital mobility and comparative advantage
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.
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Capital mobility - Capital mobility and comparative advantage
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.
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Capital mobility - Capital mobility and comparative advantage
* 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.
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Capital mobility - Capital mobility and comparative advantage
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* 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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