The Theory of Comparative Advantage
This theory of international trade postulates that high level of efficiency can be achieved in the production of specialization takes place in the various levels of production. I this perspective, the countries or the regions which have various factors of production and can produce a particular product cheaply specialize in these products while the ones it cannot efficiently produce, it can import. The efficiency is created where the specialization takes place, and the regions become known for the supply of various products which they can easily product. Some of the factors of production that are deemed to be a determinant of efficiency are such as the labor force that is needed for the manufacture of the goods being postulated (Schumacher, 44).
Additionally, the level of technology a country has is a determining factor in creating a high degree of efficiency in production. The natural resource endowment also forms a pertinent part of this set of discussion since it accentuates the very reason why the product should be produced in a particular region. For example, a closer look at the sugar production, there is areas in the world that not only has the cheap labor but also have the favorable climate and fertile soil for the growth of sugarcane. One of these areas is Brazil, which is known to export sugar in large quantities. The exportation of sugar is deemed to be quite substantial in making sure that the country gains both the foreign exchange and also stabilizes its balance of payments (Carbaugh, 435).
I entirely agree with the inception authenticity of the comparative advantage theory of production. However, it is imperative to note that this approach is only efficient when dealing with various regions with almost the same economic rank regarding the natural resources endowment (Schumacher, 114). In the real context of different economies, there is a great disparity in the economic status and with the comparative advantage in place, there is deemed to be a high level of exploitation of the less economically developed countries or regions by the highly developed areas. While the foreign companies might get into a country and exploit the natural resources of the host country for their won benefit, the host country might not find a substantial opportunity to invest in the foreign highly developed countries (Madura, 159).
Another important notion that contradicts this theory is the type of federal government at the various sets of production stances. The government structure in place is deemed to affect the environment with which the country thrives economically (Schumacher, 224). As it stands, the theory of comparative advantage is only applicable under ideal circumstances where there is peaceful coexistence and the governments here have not inculcated the rules that impede the international trade. A region may also have enough natural resources to produce a product efficiently but might lack the adequate technology to spearhead the whole project (Leamer, 198). In this prospect, the country might allow for foreign direct investment to grasp the technology from abroad. A predicament will be evident when the capital outflows will be higher than the capital inflows, and this will be tantamount of deterioration of the balance of payments for the country which is quite detrimental to the economy.
In a nutshell, the postulation of the theory of comparative advantage is seen to be quite efficient in building the various international economies. However, this theory does not inculcate the government regulations, the disparity in the economic endowment and the overexploitation of the less economically developed regions by the superior countries. Therefore, caution should be taken while accentuating this theory.
Carbaugh, Robert J. International Economics. Mason, Ohio: South-Western Cengage Learning, 2009. Print.
Leamer, Edward E. Sources of International Comparative Advantage: Theory and Evidence. Cambridge, Mass: MIT Press, 1984. Print.
Madura, Jeff. International Financial Management. Mason (Ohio: Thomson/South-Western, 2006. Print.
Schumacher, Reinhard. Free Trade and Absolute and Comparative Advantage: A Critical Comparison of Two Major Theories of International Trade. Potsdam: Universitätsverl, 2012. Print.