Trade Openness And Ricardo's Theory Of Comparative Advantage

The relationship between trade openness and economic growth is under constant dispute causing continued controversy among economists. Trade openness refers to the policies put in place by a country which either restrict or assist inter-country trade and its definitive effects on economic growth are unresolved. As International trade continues to increase, this relationship and its effects become more prevalent. This essay is going to discuss the association between the two by examining relevant theories and the empirical evidence in order to interpret whether the relationship is positively or negatively correlated.

This essay is divided into several sections, each offering an analysis on the topic. To begin, the relevant theory of Comparative

Resting at the core of neoclassical theory, it is one of the most influential concepts in International Trade Theory. It is based on the hypothesis that trade openness promotes greater economic growth elaborating on Adam Smith’s proposal that free trade could be advantageous to all countries by introducing the idea of specialisation.

Previously, countries aimed to produce everything which they needed domestically while imposing heavy taxes to keep out foreign goods. Ricardo proposed the idea of specialisation as a way to persuade countries that inter-country trade was mutually beneficial and was the most efficient way of promoting economic growth. In other words, a country gains by specialising in the production of the goods which cost them the least and exporting the surplus produce to other countries in exchange for goods with higher production costs for them. The theory states that “countries have a comparative advantage in those goods that can be produced at a lower opportunity cost than in other countries” (Sloman et al, 2015,

It states “that a country will benefit if it specializes in the production of goods whose manufacture is intensive in its abundant resources” (Gallardo, 2005, p. 323). Their theory explains comparative cost differences in terms of factor endowment differences, focusing on how much capital a country has relative to labour. By focusing on the production of goods which use their abundant factor, countries increase both efficiency and productivity as the more abundant a factor is, the cheaper it will be to produce leading to a lower opportunity cost. This ultimately results in factor price equalisation, for example, equalised wages across