Education free essay: Theory of Comparative Advantage
Theory of Comparative Advantage
According to the 19th Century economic theorist David Ricardo, production and trade at the international arena could best be handled from an analysis of the cost benefit basis. Sentiments raised by Hay and Brewer (2011, p1), confirm that the comparison of the relative gains that countries get for taking part in a certain form of trade would assist countries to find the appropriate beneficial combination of international trade engagements. According to the authors, trade from an advantageous position from cost analysis could be used as a specialization criterion for various countries. An illustration is given on how England and Portugal production parameters for wheat and wine affect their position for partaking in international trade. Using postulates from the theory, it is clear that the best combination of trade at the international front should be guided by profitability analysis.
From basic application perspective, the theory of comparative advantage is the analysis that countries ought to approach venturing into international trade, in light of the relative cost-benefit assessment. This implies that the performance and circumstances of production of competitor states should be made available for comparison purposes. In the event that a country is comparatively in a disadvantageous position to venture into the trade, it is advisable to explore a different area of specialization and leave the relatively low performance area. Simple economic rules provide that the best approach to determine if a particular venture would be favorable should be an analysis of the competitor’s relative advantage. Competitive advantage in the market is usually the key in a competitive business success such as international market with a rich variety of producers having different capacities.
Unfortunately, the lack of a level playing ground for all players seems to be a disadvantage on the part of the developing countries and an unfair advantage on developed world. The political system at the helm of international organization particularly the World Trade Organization (WTO) places the developed countries in a better position for trade. This beats economic logic to perform fair trade due to the influence that the political organization infuses into the system. According to Bagwell and Staiger (2001, p1), the organization of international trade is such that the WTO presents a negotiating barrier where the political might and bargaining power greatly affect the opportunity of the trading countries.
Despite the existence of economic factors and fairness rules that naturally exist in trade, extra forces of influence of bargain emerge to affect the chances of fairness in trade. Multilateral efficiency is severely damaged by the Most-Favored-Nation (MFN) arrangement that takes charge at the WTO functionality. Trade agreements are therefore biased in favor of the developed and powerful countries that usually have better representation into the WTO at the expense of the poor underdeveloped countries. Sequential program at the helm of WTO provisions of international trade acts as an impediment for fair trade agreement, usually locking the developing countries to access the best international markets while reciprocation of trade access by the mighty appears favorable to them.
In line with the observations of Waltz (1979, p68) in his theory of international politics, it is possible for the political might of an actor to influence the interactions with international partners in such a manner that the best interest are secured. The author acknowledges that the internal political stability and role played in international politics in a similar manner as large firms would influence business in the ordinary corporate trade. In the same way, the smaller firm would appear to be disadvantaged due to cut-throat competition launched despite playing clean business competition.
Statement on Sources Used
The above discourse applies sources that proved reading which sheds light on the various forces affecting trade at the international arena. Factors from the economic perspective provide a fair analysis of approaching trade by both strong and weak states on a free market analysis. Inclusion of trade organizations such as the WTO introduces a different aspect of international trade with respect to control and regulation in form of trade agreements. Despite the orderliness that the bargaining front is initially intended at, it always turns economic tables upside down due to influence it occasions. Political elements of the trade actors are stronger than economic foundations which force imbalance in the system. This reading list is therefore an inclusive package of sources that takes care of theory and visits practical factors that affect trade at the international arena. Various theoretical postulates involved in the formulated arguments are adequately taken care of, regarding trade at the international arena.
Bagwell, K. & Staiger, W. R. (2001) “Shifting Comparative Advantage and Accession in the WTO,” [online] <www.aida.econ.yale.edu/seminars/develop/tdw01/staiger-011105.pdf> [accessed 6 May 2011]
Brewer, T. & Hay, R. M. (2011) “David Ricardo and Comparative Advantage,” [online] <http://iang.org/free_banking/david.html> [accessed 6 May 2011]
Waltz (1979) Theory of international politics. Reading, MA: Addison-Wesley Publishers
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