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A Closer Look at David Ricardo's Theory of Comparative Advantage

2022-12-26 18:07:28
6 pages
1476 words
University/College: 
George Washington University
Type of paper: 
Research paper
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Comparative advantage is associated with the 19th Economist known as David Ricardo. According to Ricardo, in the production of goods and services, countries should concentrate on allocating their resources for the production of services and products that have both absolute and comparative cost advantage (Ruffin, 2017). In international trade, comparative advantage is used to show how to benefit by specializing in producing according to their comparative advantage. The dynamic comparative advantage, therefore, is defined as shifts in the competitiveness of productions that develop over time as a result of changes in social opportunity costs, economic coordination and economic parameters such as world prices of inputs and outputs (Ruffin, 2017). International prices are the main elements used to show the social valuations of tradable commodities in spite of the fact that a countries decision to buy or sell internationally will affect these world prices. Competition factor among different countries also influences the comparative advantage among nations in global trade. Therefore, Research on dynamic comparative advantage looks into influencers such as opportunity costs and gravitational theory influence, trade policy, diversities in technology and international property rights and international competition.

Comparative Advantage and international Trade performance.

Comparative advantage theory lays a valid argument for free trade in the international market. Specialization of countries and the existence of free exchange means that countries would produce a high income. Comparative advantage is used in international trade to make guesses on the regular prices of the future. The decisions that a state with more considerable market power makes have a direct impact on global prices. According to the WEF report, 2017, firms and industries in the international markets managed to increase their productivity by mixing and matching comparative advantage from diverse regions (World Economic Forum 2017). The dynamic comparative advantage has therefore been achieved by these nations through the process of intra-firm trade, encouraging the adaptation of network technology and draws into new sources of capital.

According to UNCTAD (2013), dynamic comparative advantage determines the duration and survival of export in the international market. According to Rugman and Verbeke, (2017), learning by doing eliminates the risk of the short life that exports from developing countries have. The high fixed costs that are linked to trade reduces the rates of export survival in international trade. Countries may bare a comparative advantage by labor through production that labor intensive in a state with abundance in capital (World Economic Forum 2017). Such developing countries exports have been seen to survive shorter in the United States market.

Technological innovations are the significant shapers of dynamic comparative advantage in international trade 2013 (World Trade Organization, 2018). Trends in technology have significantly reduced the costs of trade and transformed how states may communicate, consume and buy and sell. A dynamic shift in these technologies by different countries to help maximize their international comparative advantage have helped maximize gains and impact international trade. Service companies are the greatest shifters to digital technologies for increasing their production. Netflix adaptation of technologies made its streaming to rise from US$ 4million in 2010 to over US$ 5 billion in 2017 2013 (World Trade Organization, 2018). This dynamic comparative advantage gains by Netflix to streaming increased the firm's productivity. The UNCTAD in their latest economic reports, it is estimated that the total value of technology shifts to e-commerce both domestic and international was US$ 25 trillion in 2015, up 56% from US$16 trillion in 2013 (World Trade Organization, 2018). New technologies have significantly influenced what nations trade in, who trades on what and how the states trade. The vast adaptation of technology is changing the composition of international trade in different markets and various categories of services and goods redefining dynamic comparative advantage.

Digital technology shifts the patterns of comparative advantage by growing the significance of factors such as the superiority of quality infrastructure and the market size (World Trade Organization, 2018). Additionally, technology increases the determinants of comparative advantage such as intellectual property rights. Also, behind the border regulatory policies of trade and industrial policies affect the comparative advantage of many firms in the international market.

International Competition on Comparative advantage

A nation can boost its economic growth by specializing in the industries and sectors where it has the most substantial gain (Ruffin, 2017). Therefore, the comparative advantage can be related to competitive advantage in the essence that, a nation' competitiveness in certain industrial sectors can define its comparative advantage over others. Countries try to increase their productivity in areas that are doing well in the international market to achieve a competitive advantage. There exist three main strategies that a state can use to increase in competitive advantage in the international trade, first is to aim to be a low cost provider, second is to increase its chances in offering better products than other countries and third is to concentrate on one type of customer (Rugman & Verbeke, 2017). Therefore, comparative advantage relates with the competitive advantage in a manner that when a country fights to increase its chances in offering products that sell well in the international market, it will resort to focusing on these products and services with a competitive advantage and reduce or stop the global production of their major products. However, the fact that a country will have a competitive advantage will guarantee its' a comparative advantage, but instead, it will depend on some underlying factors such as opportunity costs (Ruffin, 2017). Research shows that there is a direct relationship between competitive and comparative advantage in international trade.

Comparative advantage in International Rights Intensive Industries.

Digital assets and technologies are most affected by laws on IP protection rights 2013 (World Trade Organization, 2018). Therefore, strong IP rights are a source of strong comparative advantage. This is because of the reason that strengthening of these rights in international trade lead to increase in relative productivity of IP intensive industries as compared to the ones that do not rely on IP rights 2013 (World Trade Organization, 2018). The comparative advantage of labor productivity states that commodities that are exchanged should be low in the capital with a smaller labor intensity (UNCTAD, 2013). The comparative advantage, therefore, requires for a shift in specialization patterns in support of a reduction in productivity of labor. A change in labor specialization means a shift in the capital-output ratio and labor productivity. Therefore, in many cases in the international market, improvement of technology has reduced the benefits of specialization while in some instances helped reduce the cost. Thus rapid gain in technological progress increases a firm's dynamic comparative advantage in international trade.

Opportunity cost

Opportunity cost is defined as the ability to produce goods and services using fewer resources at a lower opportunity cost. Opportunity cost represents the potential of benefits that a state loses out when choosing a particular product to produce over another. Therefore, in the international market, a state gains a comparative advantage when it has a lower opportunity cost than the others. The concept of trade-offs among countries can explain this. When countries engage in trade-offs, the ones with comparative advantage are those with a lower opportunity cost in the trade-off. In gravitational theory, comparative advantage is used to explain the trade countries that have little gravitational pull (Rugman & Verbeke, 2017). Comparative advantage assumes zero costs on transport thus delineates that many different nations will specialize in various products and therefore it will be less likely that different countries will attract in contrary to what is suggested by gravitational theory.

In conclusion, dynamic comparative advantage is the shift in the production of goods and services as a result of countries perfecting on the output of one types of product to achieve dominance in the international market. Comparative advantage can be influenced by competition in the global market. This will, however, depend on the underlying factors such as dynamics in production. Noteworthy, opportunity cost represents the potential benefits of a state's comparative advantage. Additionally, trends in technologies also influence dynamic comparative advantage. Moreover, comparative advantage affects the survival of exports in the international market. For a sate therefore to achieve the comparative advantage, fixed rates reduces the rates of export in international trade. Comparative advantage is the reason why some firms in international trade markets are comparatively better in producing some specific goods than the others. Comparative advantage is also used to explain the difference in gravitational pull between some countries in the international market.

References

Ruffin, R. J. (2017). Mill and Ricardo: The Genesis of Comparative Advantage. In 200 Years of Ricardian Trade Theory (pp. 133-143). Springer, Cham.

Rugman, A., & Verbeke, A. (2017). Global corporate strategy and trade policy. Routledge.

UNCTAD. (2013). SURVIVAL ANALYSIS OF THE EXPORTS OF LEAST DEVELOPED COUNTRIES: THE ROLE OF COMPARATIVE ADVANTAGE. Retrieved from https://unctad.org/en/PublicationsLibrary/itcdtab55_en.pdf

World Economic Forum. (2017). The Inclusive Growth and Development Report 2017. Retrieved from http://www3.weforum.org/docs/WEF_Forum_IncGrwth_2017.pdf

World Trade Organization. (2018). The future of world trade: How digital technologies are transforming global commerce. Retrieved from https://www.wto.org/english/res_e/publications_e/world_trade_report18_e.pdf

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