Essay1_Comparative Advantage

Foreign trade of countries is one of the most important aspects in economy. The concept of absolute advantage, founded by Adam Smith in the 18th Century explains the international trade theory as the selection of the goods that are to be imported to and exported from the country respectively. The imported products are those, which manufacturing inside the particular country is costly, and requires a high labor force. Vice versa, the exported goods are those which production costs are cheap inside the same country and expensive in another. Later in the 19th Century David Ricardo developed the theory of absolute advantage and presents the concept of comparative advantage that enables to improve the foreign trade between companions. Nevertheless, there is a debate among intellectuals whether the theory of comparative advantage is right or not.
Ricardo explains the concept of comparative advantage in his book "The Principles of the Political Economy and Taxation". The whole idea is the narrowing of the manufacturing good X the country A is not only capable and skilled, but moreover puts fewer efforts into its production and, thus, gains more profit. The country A should be concerned with the fact that currently, and as it was also earlier, other different country B can produce the same good X, too. The country B may produce the same good X with the country A for the citizens, but invests much more working force and money than its competition. On the other hand, the country B is excellent at manufacturing the second good Y at a lower price and working force than the country A. Taking these goods (X and Y) and their factors of production into the consideration, it is seen that the country A is better to produce the first good X and the country B – the second good Y, respectively. That what the comparative advantage stands for. In order to achieve the availability of these substantial goods for citizens in each of these two countries, there must be created a trade between the country A and the country B based on the comparative advantage of these producers. For its own profit and economic growth, the former need to have foreign trade with the latter. Even if, in future the country A might develop technologies and produce more the second good Y by itself, it means that there would not be a requirement of buying it from the country B, the prices of the goods Y due to technological investments would be increased, however, the prices in the country B would be decreased. This change may seem very advantageous for the latter country; however, in reality, it will cut sufficiently the amount of money in the country B, and create a necessity to have more gold and metals inside the country to reach a balance. It means that the foreign trade, based on the theory of the comparative advantage provided by Ricardo David, would be more lucrative, if the countries would specialize on the production of the goods they are most effective and qualified.
In order to make this explanation more understandable the foreign trade of Kazakhstan and Italy will be analyzed. The main export of Kazakhstan is oil, metals and minerals. The country is specialized at extraction of these raw materials. The process of their extraction and collection is comparatively cheaper than the production of machinery, enginery and other mechanical spares from these findings. Italy, instead, is skilled at production of all of the final goods, and exports them very actively ("Italy's Top 10 Exports", Workman D.). As long as Kazakhstan exports to Italy raw materials, it gains profit by selling the least costly goods and getting in return, the most expensive for production inside the country, goods by Italy. This comparative advantage in the foreign trade enables Kazakhstan and Italy get the highest utility and profitability.
On the other hand, Ricardian theory has some defects, as he did not take into account several aspects of the production of goods, countries, and consequences. First, Ricardian model concerned only on the two goods and two developed countries, which oversimplifies the whole theory. It means that there are only rich and productive states in the world, and a free import and export between them. Currently, developed countries may produce many goods and export all of them. It complicates the focusing on the particular goods and achievement of comparative advantage among other countries. Second, Ricardo does not concentrate a lot on the mobility and activity of the labor force. The theory does not include the immigration, emigration and exchange of workers, which is practical to high extent. Concerning the manufacturing of goods, the expenses on the transportation and resources' disappearance play a crucial role in the analyzing the proposition of comparative advantage theory. If the country focuses on the production of crops, there will be problems with environment such as deterioration and erosion of ground in some period; if the country bases its trade on the extraction of minerals and metals, there will be none of them. Practically, the amount of imported goods is not always substitutes the amount of exported products, and thus, even though the Ricardian theory is promising, it is not fully maintained by intellectuals in the foreign trade since Ricardo concerned only on the simplified model, rather than increasing the scope of the exploration of practicality of the comparative advantage theory.
Citations:
http://www.worldstopexports.com/italys-top-10-exports/2420




Togzhan Omasheva