Comparative Advantage - Essay

Topics: International trade, Comparative advantage, Economics Pages: 5 (1536 words) Published: December 11, 2012
Surname: Salmon
First name: Tati
Student number : 12421179
Does the idea of comparative advantage provide a good explanation of current patterns of international trade? For the last two centuries the international trade evolved a lot and many economists tried to explain it. One of the first theories that attempted to explain the international trade pattern was the Absolute advantage theory. A.Smith was a great economist; he is the one who created this theory. For A. Smith countries should specialize in products in which they have an absolute advantage. It was a good Theory but it was excluding countries that did not have any absolute advantage. David Ricardo another great British economist found this loophole in Smith’s theory and decided to make his own trade theory. Indeed according to Ricardo even if a country does not have an absolute advantage, it can still specialize in products in which it would have the less disadvantage to product relatively to another. So from Ricardo’s point of view any country would be able to specialize in something and then trade with other countries. In that case every country could enjoy the specialization and get some profit. However Ricardo also said that some requirements were needed for the comparative advantage theory: _there should be two countries and two commodities

_there should be free trade
_the labor should be the unique factor of production and the cost of a product should be evaluated by the labor required for its production _There should be a good mobility of the labor in the country _The factor of productions have to be perfectly immobile between countries _The countries shouldn’t have the same techniques of production , and there is no technological change _There should be perfect competition

_There should be full employment
_there is no transport cost

By promoting the free trade and the specialization Ricardo set up the bases of the General agreement on tariffs and trade (GATT) and then The World trade organization (WTO) , so in a way the comparative advantage is linked to international trade.

The comparative advantage became the pillar of neoclassical theories about free trade and some economist has improved the comparative advantage theory. Indeed Heckscher , Ohlin and Samuelson made the HOS model , the difference with the comparative advantage is that there are now two factor of production , the labor and the capital . In general countries tend to have absolute advantages in the products that are relatively intensive in their relatively abundant factors.

By following the same state of mind, we can say that the comparative advantage explain almost every trade that occur between North and South countries. Indeed Countries like Africa export a lot of raw materials to North Countries and import manufactured products from North countries. In this case the countries specialize in to products in which they have relatively the less disadvantages. For example the main export of African nations are: Palm oil, Gold and diamonds, oil , cocoa , Timber and precious metals . They import: Machinery and equipment, chemical, scientific instruments and some petroleum products.

Well even if Comparative advantage theory can explain some international trade, it is still a theory, and theories do not always fit to reality and that’s what we are going to talk about. First of all we can say that a perfect competition is just impossible to reach because the companies are always finding innovations and the products are not homogenous. We can also remind that nowadays the trade that occurs between countries are multilateral and do not concern only one type of good , for example France trade food , cars and other things with Germany and United states .The full employment is also impossible to reach for example in Europe the unemployment rate reach 11,6%. And to finish the transport will never be free , we will always have to pay for the fuel and other fees.

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