Comparative Advantage Of International Trade

‘The proper function of empirical work is not to test the validity of the theory but to determine if the theory is working adequately in its limited domain’ (Handbook Of Economics, pg 1342)

INTRODUCTION

Today people live in a global world which is highly integrated. It can be seen that international markets have expanded rapidly over years. International Economics put emphasis on the implication of international investment, international trade, and international borrowing and lending. International trade thus used up microeconomics models to explain the trend in international economics.

This essay will try to examine to what extent empirical studies for international trade can be accurate in relevance to the various theories.

WHY DO COUNTRIES

While countries trade with each other. When countries trade with each other they will produce those products which will bring the greatest advantages to them.

COMPARATIVE ADVANTAGE

Comparative advantage is a very important concept in international trade theory. It is very often confused with another trade theory called Absolute Advantage. The two theories come with the notion of advantageous trade.

In his book, ‘The Wealth of Nations’, Adam Smith, described the theory of Absolute Advantage in the following way;

“If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. " (Book IV, Section ii, 12).

Smith tried to explained that if country A can produce good X at cheaper price than country B and country B can produce good Y at a cheaper price than country A, thus both country A should trade its relative cheap product (good X) for country B relative cheap product (good Y). As a result both country will benefit from a cheaper

In other words, assume that England might have given up some of its production on corn and move some of its inputs (capital and labour) into the production of another good. The result for England will be much better if the amount of corn that Poland is willing to trade for the other good is greater than the quantity of corn which had been given up.

David Ricardo Comparative Advantage.

In his example to explain comparative advantage, Ricardo ilustrated two countrie, England and Poland. Both countries are producing, cloth and wine, and the input used in the production is labour. It is assumed it that trade was not advantageous for England while was more productive in both goods.

In his model, Ricardo showed that even if England had not a trade advantage but specialised in either cloth or wine, and if Portugal produced the other good, the output for the world could increase. He stated that if an appropriate amount of cloth is traded for wine and vice versa, both England and Portugal can trade more goods after specialisation and free trade. Thus, albeit England might not be technological superior it can still benefit from free trade in its