To what extent are the arguments for countries specializing and then trading with each other the same as those for individuals specializing in doing the jobs to which they are relatively well suited?



To what extent are the arguments for countries specializing and then trading with each other the same as those for individuals specializing in doing the jobs to which they are relatively well suited?

Introduction

It is difficult to consider trade and external finance independently of each other, and the two need to be viewed together. It is equally important to integrate technology with the role of trade in development financing. In fact, the theories that are used to justify the introduction of free multilateral trade for all countries, irrespective of their level of development, also have direct implications for the level of technology that different countries use to produce the goods that enter into trade. (Watson, 2005, 123-54)

According to the Ricardian theory of comparative advantage, a country is better off concentrating on the production of goods in which it has the lower relative labour costs, or higher relative labour productivity. Here the comparison is relative to other goods produced by the country. Thus a country that has 10% higher labour costs per unit of output in one product compared to those abroad, and 20% higher costs compared to those for foreign suppliers in a second product is at an absolute disadvantage relative to foreign producers in all the goods it produces, but still has a “relative” or “comparative advantage” in producing the first commodity rather than the second commodity because its disadvantage is lower. Ricardo cited the example of England and Portugal, with Portugal being more productive in both corn and wine, but whose outputs in both could be increased if England produced corn and left the production of wine to Portugal. Ricardo's theory was based on labour values and was criticized because it ignored other factors of production such as natural resources of the land and capital. The Hecksher-Ohlin-Samuelson theory aimed to remedy this deficiency by explaining trade in terms of relative factor intensities. The basic idea of the theory was that while countries would have different endowments of factors of production these difference could be offset by trade, thereby making the international mobility of factors unnecessary to economic development. (Watson, 2005, 123-54)

Explanation

Instead of trying to attract the factors of production in which it was deficient in international markets, countries could specialise in the production of those goods using the abundant factor more intensively and trade these goods for foreign produced goods that used the scarce factor more intensively (which was abundant in the foreign country). Since exports would increase the demand for the products using the abundant factor its price would be driven up, while imports would increase the supply of goods using the scarce factor and drive its price down. (Watson, 2005, 123-54)

Thus, trade would offset relative scarcity of factors and produce an equalisation of the prices of factors. Thus the implication for a country ...