How Robust Is Comparative Advantage

Krugman presents two arguments against free trade based on the new trade theory. The first argument that opposes free trade is strategic trade policy. When a nation employs a strategic trade policy, the nation’s government subsidizes its firm’s production of a particular good in an industry that can only support a few firms because of substantial economies of scale. By supporting its firm in international competition, the nation could potentially shift excess returns from foreign to domestic through an export subsidy. Strategic trade policy asserts that a country can raise its national income at another country’s

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 this research, we focus on: “application of theory of comparative advantage in Vietnam’s export and import and the gain and loss of the economy in trade”. The research intended for people who want to comprehend more about the recently situation of import and export in Vietnam. Besides, we bring to users basic knowledge and implication of comparative advantage in those situation of Vietnam through example of exporting coffee after the collapse of ICA.

Main protectionist policies include tariffs, quotas, embargos and voluntary export restraints, and Adam Smith’s idea of absolute advantage has been developed further to explain international trade. In recent years, protectionism has become closely related to globalization during which the influences of trades spread almost everywhere, so people insist upon the study of social deformities generated by improper policies on international trade and the task of pointing them out with a view to remedy. There are certainly both economic and political purposes of trade

Trade also leads to competition, a driving force in increasing the “pie.” Although competition with foreign producers might be perceived as a bad thing, it actually facilitates economic growth in the world. Competition forces producers to constantly update and improve their products. Without competition, a state becomes stagnant and simply stays at the status quo for years to come. Thus, competition helps the global economy evolve with new ideas and innovations. The instrumental role of competition and trade can be seen when comparing the fate of

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).

As each country specializes in its comparative advantage product, this means that they can produce it at a lower cost than those countries importing this product from them. Pre-trade the home country was producing its comparative disadvantage

Trade freedom is a highly important factor in determining economic freedom and wealth. No one single country has the resources required to sustain the current standards of living in developed or developing nations. Trade requires specialization according to a country’s comparative advantage. Specialization allows the most efficient and effective use of a country’s scarce resources, whether that be natural resources or labor resources. The Index shows the economic benefits of specialization and trade.

Countries are enabled by free international trade to specialise or to focus in the production of the goods in which they have a comparative advantage. Specialisation countries can take the benefit of efficiencies generated from increased output and economies of trade. The size of the firm’s market are increased by the international trade which results in lower average costs and increasing in productivity, as it ultimately leads to increase in production.

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)

Traditional trade theory explains the over-concentration of services through variations in labour skills and other contributions to production (Heckscher 1919; Ohlin 1933), or in productivity (Ricardo 1917). These differences establish ‘comparative advantages’ (Ricardo 1917) between cities, regions and countries. Thus, trade allows the concentration of services to grow and shrink in reaction to these advantages.

The Comparative Advantage H-O theory; however, has trends that do resemble Brazils trading progression. The Heckscher-Ohlin Model of the Comparative Advantage states countries will export intensive use of locally abundant factors and will import intensive use of factors that are locally scarce. This means that they will produce more of a product that they are more efficient at producing and have the resources to produce it while they import the items that they cannot produce efficiently or do not have the proper environment to make. When a country can efficiently produce a product they have a “comparative advantage” which is based on factors of productions such as labor, land, and capital. This is because a country is capable of making more profit on goods that have low input cost. Goods that require inputs that are abundant are cheaper to produce than goods that require scarce resources. Brazil reflects this trade model excellently; their top exports are all resources found naturally in Brazil. They have large quantities of Iron and crude oil which make up their top two exports. In addition Brazil’s rich soils and tropical climate makes it easy for them to produce crops such as soybeans. As the number one producer of soybeans in the world they have very low inputs to produce soybeans

A comparative advantage states that aggregate output is maximized when countries specialize in the production of goods for which they are the lowest opportunity cost producer, and then trade for other goods. This explains how countries can improve their situation through trade, rather than producing all goods themselves.

One of the most powerful propositions of classical trade theory is that the pattern of international trade is determined by comparative advantage. That is, a country with the comparative advantage in a given commodity exports, and the other with the comparative disadvantage imports. Adam Smith has founded the comparative advantage originates theory, and there have been numerous attempts to identify the economic conditions that determine comparative advantagelet us began with Adam Smith theory, and then we will discuss one correction of this theory was founded by Palley’s (2008), which is an observation the modern view of comparative advantage.