Theory of comparative advantage Theories of international trade originating from the English classical political economy have come through several stages of development. Their main subjects were and still remain the following questions: What is the basis of the international differentiation of labor? What international specialization is most effective and profitable for particular countries and regions? What criteria should be taken into account by companies that get engaged into international trade? All these questions are very acute and can be explained by the theory of comparative advantage, a fundamental and one of the most famous economic theories. The foundations of the theory of comparative advantage were laid by the English economist Adam Smith who substantiated the thesis that free trade could be advantageous for countries in case it was based on the concept of absolute advantages in production. He stated that goods should be imported from the country where their cost is considerably lower, and only those goods whose cost is lower for the exporter should be exported. In this way both countries may gain from trade. Adam Smiths ideas were complemented and further developed by David Ricardo who conceived the theory of comparative costs.
The Essay on Gains and Benefits of International Trade
The concept of international trade starts from over many years a go. According to the pre historical records it has been define as the most success. International trade allows us to expand our markets for both goods and services that otherwise may not have been available to us. The market contains greater competition and therefore more competitive prices, which brings a cheaper product home to the ...
He thought that trade can be mutually profitable for two countries even if one country had absolute advantages over the other in producing all goods. The essential point of the international trade is production of the same goods but with different cost in different countries. Each country according to Ricardo should specialize in production of those goods that require less labor and capital inputs. When the principle of free trade is active, the principle of comparative costs becomes automatically effective and leads to maximal specialization. That means that when free trade exists specialization of countries should conform with the criteria of labor cost and capital cost economy. The Ricardian model had a great impact on many economists of the world. The majority of economic works published in England was devoted to explanations and comments on the work by Ricardo.
Economists with absolutely different views, e.g. the social revolutionary Karl Marx or the advocate of liberal capitalism John Stuart Mill, used Ricardos theories as a starting point for their own ideas. But it should be kept in mind that one of the first statements of the principle of comparative advantage and trade appeared even before the Ricardian model in an article titled Essay on the External Corn Trade by Robert Torrens in 1815. Torrens supported the basic idea of absolute advantage proposed by Adam Smith but he suggested that the simple intuition was erroneous. As estimated by Steven Suranovic This is the first explicit description of one of the major results from the theory of comparative advantage. It reflects Torrens’ understanding that countries might conceivably benefit from free trade while reducing or eliminating production of a good in which it is technologically superior at producing.
Modern economists developed and modified the classical model of the international trade development. The leading place is taken by the theory of alternative expenses by the American economist Gottfried Haberler. He examined the economic model of two countries that produce two goods. In addition to the Ricardian model Haberler introduced a new feature, i.e. each country has a graph of production capabilities. These graphs show what can be the quantity of produced goods when all resources and the best technologies are used.
The Term Paper on The test of a good theory is how well its stands up in the real world
This paper attempts to prove that the test of a good theory is how well it stands up in the real world. The world is full of problems and some of the greatest problems are found in term of unpredictability. Knowing what will happen as a consequence from doing something now is therefore the essence of good theory because everybody want to be assured that what one has will turn out to be beneficial ...
In addition, when defining the comparative advantages of each country at producing similar goods production volume of one good, production of which should be reduced in favor of the other, is taken as a basis. The theory of comparative advantage plays an important role in the development of the international trade. It has come through many stages of its formation and stimulated the appearance of many new principles of the international trade. But the process of development is not over and modern conditions may cause introduction of new principles and rules that will complement the existing theories.
Bibliography:
Kilkenny (2003, August 18) Comparative Advantage. ECON 376 Rural, Urban, and Regional Economics. Retrieved October 6, 2004, from http://www.econ.iastate.edu/classes/econ376/kilken ny/Comparative%20Advantage%5CComparative%20Advanta ge.htm Suranovic, S.M.
(2003, August 20) Robert Torrens on Comparative Advantage. International Trade Theory and Policy Lecture Notes. Retrieved October 6, 2004, from http://internationalecon.com/v1.0/ch40/40c00a.html Suranovic, S.M. (2003, August 20) The theory of comparative advantage Overview. International Trade Theory and Policy Lecture Notes. Retrieved October 6, 2004, from http://internationalecon.com/v1.0/ch40/40c000.html.
