Comparative Advantage Of International Trade Analysis

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Although the theoretical links between trade and growth have been discussed for over two centuries, controversy still persists regarding their real effects. The initial theory of favourable arguments with respect to trade can be traced to the classical school of economic thought that started with Adam Smith and which was subsequently enriched by the work of Ricardo, Torrens, James Mill as well as John Stuart Mill in the first part of the nineteenth century. Since then, the justification for free trade and incontestable benefits that international specialization brings to the productivity of nations have been widely discussed and are well documented in the economic literature (see e.g. Bhagwati, 1978; Krueger, 1978). The international trade…show more content…
If there is one country that does not have an absolute advantage in the production of any product, will there still be benefit to trade, and will trade even occur? The answer may be found in the extension of absolute advantage, the theory of comparative advantage with David Ricardo. Based on the theory of comparative advantage, David Ricardo (1817) states that a country has a comparative advantage in producing a good if the opportunity cost of producing that good, in terms of another good, is lower in that country than it is in other countries. The most basic concept in the whole of international trade theory is the principle of comparative advantage, first introduced by David Ricardo. It remains a major influence on much international trade policy and is therefore important in understanding the modern global economy. The principle of comparative advantage states that a country should specialize in producing and exporting those products in which has a comparative, or relative cost, advantage compared with other countries and should import those goods in which it has a comparative disadvantage. Out of such specialization, it is argued, will accrue greater benefit for…show more content…
Nevertheless, cross-sectional investigation has its deficiencies that raise doubts about their usefulness. In these studies, countries in similar stages of development were grouped together and implicitly assumed a common economic structure and similar production technology across different countries. However, this assumption is most likely unrealistic. Thus the results reported in these studies are vulnerable to criticism. Moreover, cross sectional analysis ignore the shifts in the relationship between variables over time within a country, while export and economic growth is a long run phenomenon that cannot be studied by using cross sectional analysis. The authors saw the need to move from cross-sectional approach studies to time series techniques because of the dynamic aspects of time series data. Hence, time series approaches have been commonly used in many recent empirical works analyzing the validity of the ELG in both developed and

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