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.
Introduction Comparative advantage refers to an economic theory that depicts the ability of an individual or a firm to produce services or goods at a lower opportunity cost in comparison to other competitors in the same industry. Firms that have the comparative advantage over others are associated with lower marginal costs before the commencement of trading. The aspect of comparative advantage enables manufacturers to sell their product at a lower cost in comparison with their rivals in the market thus resulting in higher profit margins due to increased sales. When establishing the comparative advantage, the monetary and resource costs are not compared. On the contrary, the opportunity costs of services and products across various agents are
David Ricardo’s work “On The Principles of Political Economy and Taxation” written in 1817 is the example of classical writings about economics. The point Ricardo makes in Chapter 7 “On Foreign Trade” is generally that trade is beneficial and a basis for trade is comparative advantage (1817). The essay states that comparative advantage can be a reason for international trade; however there are still problems with its implication in practice. To prove that this paper will first explain Ricardo’s comparative advantage theory. Second, it will provide an example of Kazakhstan and Russia for more explanation.
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 theory of comparative advantage was first introduced in 19th century under the liberal theories of political economy by an English political-economist, David Ricardo. The theory is a part of liberal perspectives, which largely governed today’s economy. Before the comparative advantage concept introduced, Adam Smith’s theory of absolute advantage was the foundation for analyzing how countries conduct trade with each other. He stated in The Wealth of Nations (1776) that a country will benefit from trades if it exports products that have an absolute advantage (for example: lower production cost than another country), and then imports products that have higher production cost than another country. In the contrary, Ricardo argued that benefit can not only be gained by a country with an absolute advantage, because trade can also benefit a country which exports products with higher production cost than another country which produce the same products.
Less developed countries, such as African countries, largely depend upon single primary commodities for economic growth. There are several drawbacks to such a reliance on a primary product for the growth of the economy (Stein 1970: 607). Such economies are not able benefit from comparative advantage, due to the inability to direct resources towards other sectors, such as industry, with a greater potential for growth (Stein 1970: 611). According to Nafziger (2006: 611), less developed countries are “vulnerable to declining terms of trade due to the inability to shift resources to accommodate shifting patterns of comparative advantage”. Additionally, manufacturing exports are produced at a much faster rate than primary products.
Even though a country has an absolute production advantage it may be better to concentrate on its comparative advantage. To calculate the comparative advantage one has to compare the production ratios, and make the assumption that the one country totally specialises in one product. To maximise the wellbeing of both individuals and countries, countries are better off specialising in their area of competitive advantage and then trading and exchanging with others in the market place. Today there are a variety of spreedsheets that one can use to calculate comparative advantage, one such is that of the Food and Agriculture Organization (FAO). Calculation of comparative advantage is as
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.
Economics is the study of how resources are distributed throughout an economy, and how to create stability and growth throughout the economy. Like today, history was filled with the debate of government involvement, fiscal policies, and how to run the economy. Classical, Keynesian, and Monetarist Economic Theories are no different, they take their own approach when dealing with fiscal policy, government involvement, and consumer spending, to reach the same goal of creating the most successful economy. The Classical Economic Theory, became a mainstream idea around, 1776 and continued to be a widely accepted idea until around the 1930’s. Classical Economist use Say’s Law as the base principle.
Some countries produce more than their own requirement. They sell this surplus production in other countries and avoid the occurrence of deflationary pressures in the domestic economy. (v) International Trade encourages countries to compete with each other in the production of different kinds of goods at low cost of production. Competitiveness stimulates productivity. (vi) It widens the extent of market.