The theory of comparative advantage refers to the capability of one country or a party to produce a specific good at a relatively lower marginal costs as compared to another (Ricardo, 1951-1973). The theory attempts to explain that when one country is better placed to produce a good cheaply than another country, then it is better for the country to strictly produce that good it can produce cheaply. Other party or country to produce other goods that they can also produce cheaply. As put by Joseph Schumpeter, comparative advantage is one of the tools that tries to give reasons for study of economics for direction, inspiration, insight and economic methodology (Schumpeter 5).
The theory has a lot of positive applications in the current economics of the world. Most importantly, it tries to promote specialization. When a country has a comparative advantage for producing a good, it will be beneficial to put all resources necessary to produce that good. The production should be in quantities that the country will be able to export the extra to earn the benefits or gains from foreign trade. Comparative advantage is the basis why nations need to trade with one another as it tries to promote international trade. A country can produce a good cheaply will, in the long run, sell her goods to other countries thereby improving international trade. International trade goes with gains that are not only economical, but also social, political and even technological to the trading countries. When a country uses its comparative advantage to the full in production of a good, it will have an improved labor productivity as more people will be put in jobs (Hollander 185). Since the production will increase, there comes with it increased aggregate demand for the goods. The increased demand for the goods will increase better trade with other countries, and this will result in better wages for the workers. The increased labor pay eventually improve living standards for the citizens, and the country will be seen to develop.
Comparative advantage, however has a lot of limitations. When a country has the comparative advantage of producing one good, the proposition that it specializes in the production of that good alone will reduce the prospects of industrialization. The other industries, though not very aggressive, need also to thrive in the country. The more the number of industries in the country, the more industrialized the country is. More industries in the country provide more job opportunities for the citizens, more incomes and better living standards for the people.
Comparative advantage will also increase the inequality in terms of trade between two countries as there will be no mutual balance of trade. The theory, if applied, will only benefit that country that is productive enough to compete in the international market. The theory again does not exhaustively determine the terms of trade and does not try to explain the prohibitions of demand. Some consumers show specific demand for some goods, and if denied that privilege might be resentful hence decrease in the trade between the two would be trade partners. In cases where comparative advantage is the same in two countries, trade between the two countries is completely curtailed. Not either country will be ready to forgo the opportunity to produce the good as they both have the opportunity cost. The chances of free international trade will set in unfair international competition which eventually will hurt the domestic economies of other nations. Some countries will have comparative advantages over others in almost all the goods hence will unfairly compete with others hurting the economies of such countries. Lastly, comparative advantage will promote exploitation of workers in some countries that may be technically inferior and produces the goods for export, but paying the workers low wages. The workers work very hard but get very little in return as remunerations.
- Hollander, S. The Economics of David Ricardo. Toronto: The University of Toronto Press, 1979. Print.
- Ricardo, D. The works and correspondence of David Ricardo. Edited by S. Piero and M. Dobbs. Vols. 1-Xl. Cambridge: Cambridge University Press, 1951-1973.
- Schumpeter, J. History of Economic Analysis, Great Britain: Allen &Unwin, 1954. Print.