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
The Heckscher-Ohlin model of international trade argues that comparative advantage arises from differences in factor endowments (Rogowski, p. 3). Factors, in this case, being basic tools of production. It states that a country’s abundant factors will cheaper to export its scarce factors easy to import, or in other words, goods will be produced where it is cheapest to produce them (Oatley, 2014, p. 52). Countries like the U.S., for example, have lots of capital with little labor, while China is the opposite. These different factors shape the cost of production, as these countries abundant factors will be cheaper to employ than its scarce factors.
According to Adam Smith 1776) in…... a country has an absolute advantage in producing the product when it is more efficient in making that product than any other country. If two countries specialise in producing different products and trade amongst themselves, both these countries will have more of both products available to them for consumption (in which each has an absolute advantage) 2.2. Neoclassical Trade theory This is also known as Comparative Advantage. (David Ricardo1817) stated that if one country has an absolute advantage in producing two products over another country, trading with that other country will still yield more output for both countries than if the more efficient producer did everything for themselves. The country with
Nevertheless, Adam Smith (1976) and David Ricardo (1817),there came a strong wave of arguments against of the idea of mercantilists view by classical school of thoughts, classical school basically contend that it is not through high restriction of imports, but it is the expansion of stocks of human and man natural resource that boost the wealth of nation, their line of argument relies on the concept of absolute advantage Adam smith and comparative advantage (Ricardo).According to the former, a nation can only better off if only if the other is made worth off, otherwise trade will not be possible, but the latter advocate that a nation engaged in production and trade activities in the commodity where it has comparative advantage. The two are
The Wealth of Nations is a book that has stood the test of time for scholars interested in economics for hundreds of years. The theories of Adam Smith were revolutionary in the way that they set up modern capitalism. In this essay, I will go over Smith’s views on the gains of specialization, the role of government in the economy, and the relationship between workers, landowners, and capitalists. One of the first principles Smith introduces is the idea of specialization. His theory was that people should work in the areas they are skilled in.
Adam Smith is of the opinion that division of labor increases productivity. But how does that happen. Smith argues that division of labor is advantageous because it increases the know-how of performing a task and makes possible specialization in the long run. It is specialization that increases production because workers who had assumed duty in a certain division perform their task repeatedly. In that way, they can identify the one best method of performing that task more conveniently and in the shortest time possible.
DEFINITION of 'Comparative Advantage' The reason of a countries engage in the international trade even one country more efficient to produce every single particular goods than other country. The theory of Absolute Advantage founded by Adam Smith on 1776 to describe an entity is the best at doing something than other competitors, in other words, the productivity of each unit of labor is the highest by using the same resources level. Ricardian Model Comparative advantage is an essential concept in International trade which created by David Ricardo on 1817 as the ‘Ricardian Model’ <Ref. On the Principles of Political Economy and Taxation>, it is different from concept of Absolute Advantage easy to confused. In Ricardian Model, the labor productivity is the only
The theorem showed the relationship between wages and trade by using robust mathematics. It has concluded that, if tariff was abolished on labour-intensive goods, it would reduce wages greater than prices, making workers losing out, even if the whole economy is improving (The Economist, 2016). How Adam Smith’s Theory of Wages still relevant today. The content of wage theory presented by Smith is still relevant in today’s economic literature in certain ways, nevertheless, the theory also receives its fair share of criticisms. Smith believed that wage is determined in the market through supply and demand for labour; this theory is still widely use today by economists to explain wage determination in a simple economy.
It is international specialization that gives a manifestation of comparative advantage rule. This rule emphasizes the difference of production cost that is the key of trading. When participating in export, a country tends to export a product that is produced with the least disadvantages and import goods that do not have comparative
In Modern Theory, the gains from trade are divided into the gains from production (specialization) and the ones from consumption (exchange). Both consumers and producers gain from international trade by consuming more and producing more than the pre-trade level. Whereas the classical theories were based on static advantages, theory nowadays assumes dynamic comparative advantage and bases on the determination of equilibria. The optimal allocation of trade versus production therefore can be found by comparing the opportunity cost of a good to the return it yields from im- or exporting. The total amount of gains from trade is then measured by adding up consumption and production gains.