International Economics



International Economics

Explain the concept of comparative advantage and the principle theories of why trade occurs.

Solution

In economics, comparative advantage is the main concept of the traditional theory of international trade. The theory associated with the comparative advantage explains why, in a context of free trade, each country, it specializes in the production for which he has the productivity highest or the lowest low, compared with its partners, increase its national wealth. This production is one for which he holds a "comparative advantage". According to Paul Samuelson (Nobel laureate in economics in 1970), this is the best example of a principle but undeniable economic counterintuitive intelligent people.

The main conclusion of this theory is that the next win at the opening to foreign trade is always and regardless of the competitive national guaranteed. This is a decisive argument of the theorists of free trade against those advocating protectionism for fear of not finding opportunities, because it refutes the idea of "less competitive nations" who would not have to buy, and nothing to sell, in cross-border trade. Of course, the theory does not deny that international trade may be detrimental to some countries, when its terms are not those of free trade (imperialism, colonialism, and other forms of domination), nor the fact that the increased earnings of a country does not necessarily mean a corresponding increase in the welfare of its inhabitants.

Generally the basis for the teaching of the international economy, this theory two centuries old has no formal refutation. This is the official creed of the World Trade Organization (WTO). However, it responds to numerous assumptions, explicit or implicit, that make it questionable. Since 1817, economists have therefore set out to address these hypotheses, complicating and enriching the theory. Empirical validation of the latter, too, involved a complex of its postulates and its elements.

Although these studies have always confirmed the results of Ricardo, they have clarified certain aspects, and in so doing, raised new problems. For example, the theory shows that trade openness increases the national wealth, but also that it changes the distribution at the expense of some economic agents, perhaps the poorest. Countries specialize in what better place following the rules of comparative advantage and trade with other countries that focus on what they do best, for the benefit of the two. Subsequently, advanced the theory with the Heckscher-Ohlin where he focused on the advantage for countries to have strong position in one of the factors of production, raw materials, labor or capital. Examples of the Heckscher-Ohlin model in action are the advantage of Middle East oil and China's relatively cheap labor force.

Analyze and discuss the sources of comparative advantage in national economies.

Solution

The traditional theory of comparative advantage is simplistic and unrealistic. Ricardo never gave an adequate account of why regions specialize in some goods and not in others, instead offering a picture that is static with respect to time, overemphasizes labor and climate, ignores consumption as well as the role of national economies of scale and agglomeration, ...