The Principle of Comparative Advantage

            Comparative Advantage is an economic theory coined by David Ricardo which means that a country or a person can be considered as having “comparative advantage” if he can produce a certain product at a lower cost. It does not however mean that having a comparative advantage is being the best at producing that product. Having the capability to produce the best of the product is what is called Absolute Advantage.

            Comparative Advantage determines whether it pays to produce the product or to import it. Different countries have different absolute advantage in producing goods. This is because of different conditions, such as climate, the countries have. For instance, the United Sates are better at producing wheat and Brazil, at producing coffee. If the two countries trade their goods, then it will be more beneficial to them both.

            At the same time a country may not have the absolute advantage at producing a certain good, but it may have the comparative advantage at producing that good. For instance, China, because of cheap labor, has comparative advantage at producing garments although it does not have the absolute advantage of the product. Thus, other countries, for instance the United States, may have the resources and labor force in producing the same garment as the ones produced by China and yet imports it from them. The reason is that, it will cost more for the United States to produce the garment than to import it.

            In the long run, although other US workers, those who can produce garments, will loose their jobs, the loss of these jobs are economically compensated by the cheaper cost of importation of garments than by producing it locally. This means that the country will be able to have garment at lower cost despite the loss of some jobs. Thus, one of the limitations of comparative advantage is that it eliminates low paying jobs at the expense of free trade.

            Now, as for the private sectors reaction to the promotion of free trade by organizations such as the World Trade Organizations, the private sectors should embrace the promotion, and at the same time, the regulations of these organizations. This is because these organizations enforce economic balance, with its regulations (such as quotas), which acts as protection against monopoly. As illustrated by the World Trade Organization’s Multifiber Agreement, when the agreement expired most of the textile companies in the United States and the other developing countries have closed shop. 

The agreement, which protected the local (US) garment factories and other factories in the developing countries were forced to close by the end of the agreement since China, with cheaper garment and without the quota, now offers better deal for garment. Thus, the China with its capability to control the price of the majority of products they produce to alleviate any inflationary pressure, now dominates global production of goods. And compared with the United States, the Shanghai Index had 130% increase and again while the US economy is said to be having a recession.

            On the other hand, based on the concept of comparative advantage, the developed countries should focus on their comparative advantage to create global economic balance. The United States, for instance should concentrate on high end products and services, which is its comparative advantage. With the help of organizations such as the World Trade Organization which evens up the field, the United States, and other countries which have concentrated on their comparative advantage can greatly benefit and sustain the loss of the China’s dominance in production of low end goods.