Free Comparative Advantage Theory Essay Sample

Ricardo's theory of trade expounds on the comparative advantages countries have in the production of goods and services. Ricardo's theory gives the importance of specialization and division of labor between the countries that make it necessary for the countries to engage in international trade. The theory of comparative advantage as postulated by David Ricardo is built on the cost of production of the similar products between two producers. There are costs that are involved in production of a commodity and these costs are not equal between producers in two different places. Comparative advantage therefore is the low opportunity cost incurred in production of the commodity as compared to other producer of the similar commodity or a different country. The country engages in production of the commodities it has a comparative advantage over and imports commodities that it does not have comparative advantage over. The comparative advantage thus necessitates the countries to enter into trade with each other to derive the maximum advantage.

To illustrate the comparative advantage, assume that there are two countries A and B, producing two similar products X and Y. The table below shows the quantity of production attained by both countries. Assume further that units of labors in both countries are homogenous.

Table1.1

Table 1.1 show amounts of the commodities X and Y produced by countries A and B. Country A produces 50 units of both commodities X and Y while country B produces 200 and 100 units of commodities X and Y respectively. For the countries to benefit from the international trade, they have to produce the commodities they have comparative advantage in. This is the commodities they produce at the lower costs compared to the other country. Country A has the comparative advantage in producing commodity Y thus its should engage in production of commodity Y as compared to commodity X which should be imported from country B. to determine the comparative advantage between the two producers, the following assumptions should be made; costs are similar in both countries, no cost of transport involved, there are only two producers producing two products, the factors of production are not fixed, no barriers to trade such as tariffs and that the sellers and the buyers have the perfect knowledge about the operation of the market.

Corn Laws on the other hands were laws that aimed at imposing tariffs on the grains imported to United Kingdom. The tariffs imposed were meant to protect the prices of corns from falling down due to the importation of cheap grains from other countries. Tariffs were imposed to reduce the competition faced by the grains farmers in United Kingdom posed by other producers who produced the grains at low costs. Corn Laws were a deviation of free trade that ensures that the landlords received high profits from the sale of corns.

On the other hand Heckscher-Ohlin model sometimes referred to as the H-O model is a mathematical that builds on the theory of comparative advantage as postulated by David Ricardo. Heckscher-Ohlin modelshows the equilibrium production between two producers or countries attained when they produce the goods they have comparative advantage over and import those that are expensive to produce in the country. H-O theory of trade postulates that the country producers the commodities that it has comparative advantage over other countries and thus cheap to produce and important the commodities that are expensive to produce. There are difference between the H-O model and the Ricardian theory of comparative advantage. The comparative advantage as postulated by Ricardo state that labor is only factor of production. However, H-O model brings out the issue of differences in capital endowments between the countries. Different countries have different capital endowment such as infrastructure that would bring variations in production between the countries.

In order to develop H-O model, the following assumptions were made; free movement of labor, there are different technologies used in countries, Production exhibit constant-return-to scale and both countries have similar technology applied in production.

Assume that a country engages in production of two products; A and F. assume further that K and L is capital and labor respectively. Given the equations below;

A = K^{1 / 3}L^{2 / 3}

F = K^{1 / 2}L^{1 / 2}

Capital intensive producer would gain comparative advantage by using more capital in production of F product while the labor intensive producer would have comparative advantage in production of commodity A.

 

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