How Robust Is Comparative Advantage

Main protectionist policies include tariffs, quotas, embargos and voluntary export restraints, and Adam Smith’s idea of absolute advantage has been developed further to explain international trade. In recent years, protectionism has become closely related to globalization during which the influences of trades spread almost everywhere, so people insist upon the study of social deformities generated by improper policies on international trade and the task of pointing them out with a view to remedy. There are certainly both economic and political purposes of trade

The term competitiveness defines the ability of a region to export more than its imports while including all “terms of trade” to reflect government legislation and import barriers. In other words, according to the world competitiveness report, competitiveness is “… the ability to design, produce, and market goods and services, the price and non- price characteristics of which form a more attractive package than those of competitors.” (Pg3.) Each nation has different competitiveness level, which relies on multitude factors such as; raw materials, innovative technologies, energy prices, the type of economy, legislations, and the exchange rate fluctuations. Nevertheless, the prosperity of countries depends on the nation’s competitiveness status.

Krugman presents two arguments against free trade based on the new trade theory. The first argument that opposes free trade is strategic trade policy. When a nation employs a strategic trade policy, the nation’s government subsidizes its firm’s production of a particular good in an industry that can only support a few firms because of substantial economies of scale. By supporting its firm in international competition, the nation could potentially shift excess returns from foreign to domestic through an export subsidy. Strategic trade policy asserts that a country can raise its national income at another country’s

This paper explores the “application of theory of comparative advantage in Vietnam’s export and import and the gain and loss of the economy in trade”.

As each country specializes in its comparative advantage product, this means that they can produce it at a lower cost than those countries importing this product from them. Pre-trade the home country was producing its comparative disadvantage

Countries are enabled by free international trade to specialise or to focus in the production of the goods in which they have a comparative advantage. Specialisation countries can take the benefit of efficiencies generated from increased output and economies of trade. The size of the firm’s market are increased by the international trade which results in lower average costs and increasing in productivity, as it ultimately leads to increase in production.

Trade freedom is a highly important factor in determining economic freedom and wealth. No one single country has the resources required to sustain the current standards of living in developed or developing nations. Trade requires specialization according to a country’s comparative advantage. Specialization allows the most efficient and effective use of a country’s scarce resources, whether that be natural resources or labor resources. The Index shows the economic benefits of specialization and trade.

Trade also leads to competition, a driving force in increasing the “pie.” Although competition with foreign producers might be perceived as a bad thing, it actually facilitates economic growth in the world. Competition forces producers to constantly update and improve their products. Without competition, a state becomes stagnant and simply stays at the status quo for years to come. Thus, competition helps the global economy evolve with new ideas and innovations. The instrumental role of competition and trade can be seen when comparing the fate of

The Comparative Advantage H-O theory; however, has trends that do resemble Brazils trading progression. The Heckscher-Ohlin Model of the Comparative Advantage states countries will export intensive use of locally abundant factors and will import intensive use of factors that are locally scarce. This means that they will produce more of a product that they are more efficient at producing and have the resources to produce it while they import the items that they cannot produce efficiently or do not have the proper environment to make. When a country can efficiently produce a product they have a “comparative advantage” which is based on factors of productions such as labor, land, and capital. This is because a country is capable of making more profit on goods that have low input cost. Goods that require inputs that are abundant are cheaper to produce than goods that require scarce resources. Brazil reflects this trade model excellently; their top exports are all resources found naturally in Brazil. They have large quantities of Iron and crude oil which make up their top two exports. In addition Brazil’s rich soils and tropical climate makes it easy for them to produce crops such as soybeans. As the number one producer of soybeans in the world they have very low inputs to produce soybeans

The Ricardian Theory of comparative advantage, named for the eighteenth-century classical economist David Ricardo, holds that the general welfare of two or more countries will be higher for all; if free trade among them is permitted than if each attempts to restrict trade or trade produce only for itself. This will be true even if some countries are absolutely more efficient in the production of all goods than the others are and even if, hypothetically, each country could produce everything for itself. (Jones 289)

A comparative advantage states that aggregate output is maximized when countries specialize in the production of goods for which they are the lowest opportunity cost producer, and then trade for other goods. This explains how countries can improve their situation through trade, rather than producing all goods themselves.

To estimate a country’s comparative advantage or comparative disadvantage in commodities, industries or sectors many researchers uses standard approach or methodology for RCA index. Theoretically, we can measure comparative advantage in requisites of relative prices, when there is no trade. In accordance with Ricardian theory, comparative advantage happens due to technological dissimilarities across nations, whereas the H-O theory considers cost dissimilarities occurs due to differences in factor prices across countries, assuming constant technology. Hence, we summarize that trade theories in the classical framework are based on pre-trade relative price differentiations across countries. Although measuring comparative advantage through H-O

The Smith’s original theory of comparative advantage is commonly used to describe international trade and support the need for free trade policies. The theory uses the concept comparative advantages in production to show the logic of specialization in production and use of resources. But despite the benefits associated with comparative advantages, free trade policies are usually questioned, and nations try to avoid full specialization in their production. Palley’s observation on the modern international market contrasts Smith’s original theory, by showing that it does not consider new international market realities.

One of the most powerful propositions of classical trade theory is that the pattern of international trade is determined by comparative advantage. That is, a country with the comparative advantage in a given commodity exports, and the other with the comparative disadvantage imports. Adam Smith has founded the comparative advantage originates theory, and there have been numerous attempts to identify the economic conditions that determine comparative advantagelet us began with Adam Smith theory, and then we will discuss one correction of this theory was founded by Palley’s (2008), which is an observation the modern view of comparative advantage.

Comparative advantage is a principle developed by David Ricardo in the early 19th century to explain the benefits of mutual trade (Carbaugh, 2008). Many underlying assumptions of comparative advantage depend on states of economic equilibrium and an absence of economy of scale. In reality, economies are dynamic and subject to innovation and interference; which has led to revised assumptions of return and competition (Krugman, 1987). These factors have created questions of free trade and governmental participation in an economy by the development of strategic trade policies. These new concepts do not replace the theory of comparative advantage; however, they further explain how trade can benefit a country's economy (Krugman, 1987).