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Comparative Advantage Vs Comparative Advantages

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The aim I want to pursue through this paper is identifying institution, other than “rule of law” and “governments”, as sources of comparative advantage. In order to fulfil my purpose I will analyze what is comparative advantage in international trade starting from Ricardo’s theory and moving on to Heckscher-Ohlin model. Firstly, for a better understanding, I am going to point out which are the differences between comparative and absolute advantage and which are the classical sources pointed out through the two models above named that determine the comparative advantage.
Then I will move to the core part of this paper trying to analyze which are the institutions causing comparative advantage such as financial development, labor-market institutions …show more content…

CLASSICAL SOURCES OF COMPARATIVE ADVANTAGE

3.1 Comparative advantage in Ricardo’s theory.
In the first paragraph we explained the differences between comparative advantage and absolute advantage according to Ricardo’s two nations-two goods-one factor of production model.
Ricardo bases comparative advantage on technology. In an economy in which there is only one factor of production it is important for a country to maximize the technology it has available in order to create and exploit a latent comparative advantage. Technology in this model is correlated to unit-labour costs and productivity.
According to Ricardo’s theory even though a country has higher technology in producing both factor when it moves from a condition of autarky to one of free trade one of these productions will be abandoned in order to take full advantage of the comparative advantage the country has in producing one of those commodities. The same will happen in the foreign country.
Therefore, specializing allows both countries to expand their PPF through the increasing of level of consumption and this enable the two states to gain from …show more content…

Levchenko and Quy-Toan Do through their paper “Comparative advantage, demand for external finance and financial development” examine the inverse relationship between comparative advantage and financial development. They illustrates how financial development is influenced by comparative advantage, by using a model in which a country’s financial development is a result of the productive structure of the economy. Their main idea is that financial development is not endogenous and therefore can not be considered an endowment of which a country is provided with. The underlying concept of this paper is that comparative advantage determines the production pattern and therefore the external financing needs. They used a model in which there are two sectors: one is financial dependent and the other one is not. The size of the financial system is obviously a function of total output in the financially intensive sector and the quality of the system is a function of its size. They measured the quality through how easily an entrepreneur with positive net present value projects is able to find external finance. This lead to the conclusion that the bigger the size of the financial sector the more easily entrepreneurs can fulfil their financial needs. Through this model they related financial development to the demand for external finance in production. As soon as they open the model to trade, the country exporting financially related good experiences a deepening in its financial

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