Comparative Advantage

From the textbook, the definition for comparative advantage is “Theory that a nation having absolute disadvantages in the production of two goods with respect to another nation has a comparative or relative advantage in the production of the good in which its absolute disadvantage is less”, in a simply way, it means the economy’s ability to produce goods and services at a lower opportunity cost than others.

Combined the article “Ricado’s theory of comparative advantage: Old Idea, New Evidence” from Arnaud constinot and Dave Donaldsonand textbook, David Ricardo developed the comparative advantage theory in 1817 and it had huge influences on international business. He pointed out the basis for mutually beneficial trade is not absolute but comparative advantage. Especially under the international business market, even one country might has absolute advantages on producing all the goods and services, but if two countries are able to allocate rational and cooperate in the free market, then each country will have more consumption by exporting and importing. The instance on the textbook between US and China also showed the good example about comparative advantage. Even US have absolute advantage on technology or labor, but if opportunity cost differs, a country must have a comparative advantage in the production of one of the two goods. Comparative advantage can constantly prompts international trade. Countries export goods which they have relative low opportunity cost.

Nowadays, Should developing counties conform to comparative advantage or should they defy it also become the hot spots of society. For the developing countries who prefer to defy the comparative advantage tend to focus on export more specific items and sophisticated goods that are more manufacturing. From my perspectives, it is necessary to use comparative advantage especially in developing countries. Reinforce the comparative advantage in developing countries can help them participate in the international business market and prevent the domination from rich countries.

Citation:

Costinot Arnuaud and Donaldson Dave;Ricardo’s theory of comparative advantage:Old Idea, New Evidence; The American Economics Review, May 2012, Vol.102(3), pp.453-458

Lactard Pauline and Rougier Eric; Can Developing Countries Gain From Defying Comparative advantage?Distance to comparative advantage, Export Diversification and Sophistication, and the Dynamics of Specialization; World Development, Feb 2018, Vol.102, p.90