Switzerland and Comparative Advantage; Factors, Specialization and Protectionism in a Global Economy
ECO GM/ 561
July 3, 2010
Switzerland and the Concept of Comparative Advantage
While most in today’s hyper-competitive global economy look towards countries including; China, India, Taiwan, Vietnam, and others in search of lower production costs seeking the ever illusive comparative advantage, others have different ideas. Switzerland, a tiny land locked nation in central Europe surrounded by Alps with a relatively small population of 7,630,605 is one such country. It operates with its own comparative advantage in the industries of chemical/Pharmaceuticals’ production and export, watch making, chocolate manufacturing, and a strong financial sector. While Switzerland has recognized most of its potential in these areas, one area that of corporate taxation still remains undeveloped.
Comparative Advantage; the Concept and Identifying Factors
As a general rule, comparative advantage is defined as “the principle of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party…” (Investorpedia.com, 2010) Only after all the components of comparative advantage are completely understood is it clear how countries like those of Switzerland compete in today’s market.
The Concept of Comparative Advantage
“In economics, the principle of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party…the advantage a nation has by being able to produce products or services more efficiently and at lower cost than a competitor nation… A situation in which a country, individual, company or region can produce a good at a lower opportunity cost than a competitor.” (Investorpedia.com, 2010) To understand how a country can produce a product, good, or service at a lower opportunity cost, it is essential to understand that opportunity costs are the next best choice given to a person, entity, or country given several mutually exclusive choices.
Identifying Factors of Production and/or Technology
Switzerland is limited in its geographic location, ability to attain and maintain inexpensive human capital, population growth, and ‘other’ factors which enable a country to compete in the area of inexpensive production. That being said, the higher education of its citizens, its ability to attracted highly skilled personnel, and the overall quality of its products and research provide a distinctive advantage. While Switzerland itself lists three areas in which the country’s economy is dependant including; agriculture, industry, and services, one of its highest produced exports are chemicals used in the development and use of pharmaceuticals valued at (in millions) $44,846 annually. (Information about Switzerland, 2010) A second factor, that of production can be seen in Switzerland’s ability to produce specialty products and services that lend themselves to the country’s ability to maintain a comparative advantage despite higher costs to the consumer. The answer lies within the investment made in its citizenry through education and internships or ‘apprenticeships’. While other developing nations depend upon a populous with a minimal education and basic skill sets to handle basic assembly or construction needs allowing for inexpensive human capital, Switzerland encourages its work force to seek higher levels of education in the fields of finance, chemistry, and pharmaceuticals. Other industries that remain specialties including confectionaries are also encouraged.
Specialization, Opportunities, and Protectionism
“Switzerland is one of the countries with the highest...