Advantages Of Comparative Advantage

International trade theory provides explanations for the pattern of international trade and the distribution of the gains from trade. The study of trade emerged in the era of mercantilism (approximately in 16th century) as a crude set of arguments about how a nation should trade. The theory of International Trade examines the reasons why different countries exchange their products, but in addition the aftermath that this process has, in the internal economy of a country involved in international trade. Adam Smith, in The Wealth of Nations in 1776, postulated that under free trade, each nation should specialize in producing those goods that it could produce most efficiently. Some of these would be exported to pay for the imports of goods that could be produced more efficiently elsewhere. Smith ridiculed the fear of trade by comparing nations to households. Since every household finds it worthwhile to produce only some of its needs and to buy others with products it can sell, the same should apply to nations. The theory of absolute advantage is based on the assumption that the nation is absolutely better (i.e., more efficient) at production of

However, it was apparent to economists that nations with similar resource endowments exchanged similar products with each other. Economists felt that trade explained solely by comparative advantage was an incomplete analysis of international trade. Furthermore, since the classical trade theory was unable to explain intraindustry trade, economists decided to expand on the classical trade theory by creating a new theory of trade (Carbaugh, 2011). The new theory states that economies of scale provide incentive for a country to specialize in a particular product (Carbaugh, 2011). Furthermore, based on economies of scale, nations with similar factor endowments will trade with each other as sometimes it is beneficial (Carbaugh, 2011). Arguments stemming from this new trade theory puts the economic case for free trade in doubt.

The term competitiveness defines the ability of a region to export more than its imports while including all “terms of trade” to reflect government legislation and import barriers. In other words, according to the world competitiveness report, competitiveness is “… the ability to design, produce, and market goods and services, the price and non- price characteristics of which form a more attractive package than those of competitors.” (Pg3.) Each nation has different competitiveness level, which relies on multitude factors such as; raw materials, innovative technologies, energy prices, the type of economy, legislations, and the exchange rate fluctuations. Nevertheless, the prosperity of countries depends on the nation’s competitiveness status.

In modern times trade between Americans and Asians in the market has increased. After WW2 the resource-lacking country of Japan had two options: find an alternative power source to oil, or trade. It became obvious in the late 20th century, which route they chose. “Made in Japan” used to be plastered over thousands of consumer products in America, and moving into the 21st century, this has shifted to “Made in China”; on almost every item an American buys, they can find the “Made in China” tag. Unfortunately, the Americans educational system has taught people from a young age to scorn such a tag, and they deride the Chinese that can produce cheap socks for them, before quickly placing the item in their carts. Conversely, if Americans were educated on the principles of free trade, they would understand the concept of comparative advantage, and be thankful for the efficient Chinese

Free trade is an important economic policy that has been brought to the forefront of debate. Arguments have varied from the potential harm it brings to specific groups of people, to the idea that free trade is extremely beneficial in the increasing of competition and improving the nationwide economy. Free trade is a policy that practices removing restrictions such as tariffs, taxes, and bans, allowing for free participation among all kinds of economies and producers. In other words, free trade is a way to “break down” economic barriers. Comparative advantage is a term often used to support the policy of free trade. The theory of comparative advantage displays that if trading partners produce where there is the lowest opportunity cost, then

Milton Friedman: "The Most Influential Economist" Renowned as the most "Influential" economist of the 20th century, following his gifts to economics field, Milton Friedman was the economic advisor to the republic U.S. president Ronald Reagan. Started as an unemployed in 1935, following his Masters of Arts degree, Freidman's initial ideas targeted the government policies, as to how it was one of the deadliest reasons for the Great Depression. His first published book "Incomes from Independent Professional Practice"- was a jointly effort with Simon Kuznets, who was working in the National Bureau of Economic Research, where Friedman started his employment career. Some of his work includes some great papers like NEED FOR FUTURES MARKET and A COMMENT

This paper is meant to determine whether or not the theory of comparative advantage applies to China with respect to the industrialized world. We will also touch on how the theory of factor endowment applies to China. There are some countries which operate in autarky, which will be discussed as well. Finally, we will examine how the distribution of gains from free trade causes much political debate regarding trade with China.

This article helps to see the theoretical development of comparative advantage through the findings of David ricardo. It states how the basis of this model can be applied to multiple goods and actually be used to benefit countries and have gains from trade.

The theory of comparative advantage explains the benefit of free trade. According to this theory by David Ricardo in the early 19th century, “Both countries will be better off if each specializes in the industry where it has a comparative advantage, and if the two trade with one another.” (Citation) International trade opens up markets to foreign supplier, and domestic companies need to improve their efficiency, boost productivity, and lower cost to increase competitiveness instead of enjoying monopolies or oligopolies that enabled them to keep prices well above marginal costs. On the other hand, international trade also offers domestic companies bigger demands and broader markets; therefore more jobs relevant to export have been created. Furthermore, jobs in the US supported by goods exports pay 13-18 percent more than the US national average (ustr.gov).

Which is cost difference determines the patterns of international trade. Absolute advantage is trade benefits when each country is at least cost producer of one of the goods being traded. In the 1800s, David Ricardo developed the theory of comparative advantage to measure gains from trades. This theory is based on comparative advantage and it states each nation should specialize in production of those goods for which its relatively more efficient with a lower opportunity cost.

The concept of absolute advantage is one of the most fundamental areas of concern in the study of economics. In its basic meaning, absolute advantage refers to the ability of one individual or party to produce more of a particular good or service than other competitors given the same amount of resources. In this regard, absolute advantage becomes a very important aspect in the concept of international trade as it clearly defines the different areas where countries should specialize in order to maximize their productivity and enhance international trade. The principle of absolute advantage was first elucidated by Adam Smith in his study of international trade using labor and capital as the only factor inputs(Free, 2010).

International trade provide the comparative advantage. All countries can be the beneficiaries when trade with one another, because trade allows each country to specialize in doing what it does best. However, the

According to Colander, "The reason two countries trade is that trade can make both countries better off" (2004, p. 416). In economics, the theory of comparative advantage clarifies why it can be advantageous for two countries to trade, even though one of them may be able to produce every kind of item more cheaply than the other. What matters is not the absolute cost of production, but instead, the ratio between how easily the two countries can produce different kinds of goods. The basic idea of the principle of comparative advantage is that as long as the relative opportunity costs of producing goods differ among countries, then there are potential gains from trade.

Comparative advantage is a principle developed by David Ricardo in the early 19th century to explain the benefits of mutual trade (Carbaugh, 2008). Many underlying assumptions of comparative advantage depend on states of economic equilibrium and an absence of economy of scale. In reality, economies are dynamic and subject to innovation and interference; which has led to revised assumptions of return and competition (Krugman, 1987). These factors have created questions of free trade and governmental participation in an economy by the development of strategic trade policies. These new concepts do not replace the theory of comparative advantage; however, they further explain how trade can benefit a country's economy (Krugman, 1987).

The country can maximize their wealth by putting the resources in the most competitive industries. Government created comparative advantage rather than free trade because now easier moves the production processes and the machines into countries that can produce more goods (Yeager & Tuereck, 1984). However, many countries now move to new trade theory suggests the ability firms to limit the number of competitors associated with economic scale (reduction of costs with a large scale of output) (Krugman, 1992). The comparative advantage occurs when two-way trade in identical products, it will useful where economic scale is important, but it will create problem with this model. As a result, government must intervene in international trade for protection to domestic firms (Krugman, 1990)