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Analysis of Comparative Advantage

Comparative advantage is an economics principle that is associated with the English
classical economist, David Ricardo. The concept first appeared in 1817 in Ricardo’s book “On
Principles of Political Economy and Taxation” (Ruffin, 2017). The principle argues that
countries should specialize in producing goods and services that they can produce using fewer
resources than those of their trade partners (Ruffin, 2017).
Explanation of comparative advantage
To better understand the principle of comparative advantage it is important to understand
the concept of opportunity cost. Assuming a country has the option of producing either of two
products, A and B. Both products have benefits for the country. If it chooses to produce product
A alone, the opportunity cost of such a decision is the potential benefits it forfeits by not
producing product B. By forfeiting to produce product B, we may assume that the potential
benefits of producing product B are not as great as those of producing product A. Alternatively,
that the decision to produce product A has a lower opportunity cost.
According to the theory of comparative advantage, countries specialize in producing
goods and services that have low opportunity cost (Ruffin, 2017). In other words, countries
invest their resources in production of goods and services that they can produce using lesser
resources than their trade partners and which bring them more benefits than the alternative
products or services.
Application of comparative advantage in international trade

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The theory has been used to analyze and influence the kind of goods and services that
countries trade with each other in international trade. Ricardo himself used the theory to analyze
trade between Portugal and England. In his analysis, he argued that England was able to
manufacture textiles more cheaply than Portugal while Portugal was able to produce wine more
cheaply than England (Ruffin, 2017). There was, therefore, no need for England to invest its
resources in production of wine because such wine will always be more expensive than that of
Portugal. England producing wine would thus not confer to her any significant benefits.
Similarly, Portugal would not get significant benefits from manufacturing clothes. Thus, instead
of striving for self-sufficiency, Portugal would be better off specializing in production of wine
and selling it to England while England would likewise benefit more by abandoning production
of wine and invested its resources in manufacturing of clothes where it had a comparative
advantage. True to Ricardo’s analysis and recommendations, England and Portugal eventually
specialized in production of clothes and wines respectively (Ruffin, 2017).
The example of England and Portugal is mirrored in modern times where the principle of
comparative advantage continues to influence the type of goods and services that countries trade
with each other. A good modern example of comparative advantage at work is the trade between
USA and China. China has abundant cheap labor that allows it to manufacture simple consumer
products at a much lower cost than the U.S (Ren & Ma, 2018). The U.S., on the other hand, has
specialized labor and technical know-how that allows it to produce highly sophisticated goods
such as passenger jets. If the U.S. tried manufacturing simple consumer products, the products
would be more expensive than Chinese ones and, therefore, would not sell much. On the other
hand, if China attempted to manufacture sophisticated products such as passenger jets it would
find itself struggling to manufacture them at fair prices and the right quality. Its passenger jets

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would, therefore, not have significant market. The two countries, therefore, settle on only
manufacturing products that they have a comparative advantage in.
Weaknesses of comparative advantage theory
The theory of comparative advantage is not without critics. On paper, the theory of
comparative advantage is a sound one. However, the fact still remains that almost all countries
produce goods and services that they do not a significant comparative advantage in. Why would
this be the case? There are various reasons that explain why comparative advantage may not
work well in all situations.
First, the theory assumes that all markets are perfectly competitive. This is not the case.
Taxation policies and tariffs, among other factors have created markets that are not perfectly
competitive (Baiman, 2017). For example, even though China might have a comparative
advantage against the U.S. in the manufacture of simple consumer goods, the U.S. might impose
tariffs on such goods (as it recently did) thus making Chinese products to cost just as much or
even more than their American counterparts. In addition to tariffs a government may also give
tax breaks to products produced in a given country so that their prices are cheaper than those of
products from a trading partner (Baiman, 2017). The effect of tax breaks is the same as that of
tariffs.
Another weakness of the theory is that it fails to take into account other factors that
impact on prices of goods and services. In particular, it does not take into account transportation
costs. Such costs are especially important when two trading partners are separated by huge
distance (Murdock, 2019). For instance, the cost of transporting a good from China to Canada

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may be significant enough to make it as costly or even costlier than similar Canadian products
despite the product being manufactured very cheaply in China.
The theory does not also apply to all goods. For instance, whether they have comparative
advantage or not, many countries strive to produce their own food products for food security.
Another product that countries strive to have self-sufficiency is weapons for defence (Murdock,
2019). Other factors such as the need to prevent structural unemployment may also force
countries to continue producing goods that they have little comparative advantage in.

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References

Baiman, R. (2017). The Global Free Trade Error: The Infeasibility of Ricardo’s Comparative
Advantage Theory. Routledge.
Murdock, C. W. (2019). Why Ricardo’s Theory of Comparative Advantage Regarding Foreign
Trade Doesn’t Work in Today’s Global Economy: Labor Arbitrage, Disloyal Capital,
WTO Violations and National Security Implications. Disloyal Capital, WTO Violations
and National Security Implications (April 1, 2019).
Ren, Z., & Ma, Y. (2018, October). The Significance of Comparative Advantage Theory and
Competitive Advantage Theory to the Development of China’s Foreign Trade. In 2018
International Conference on Social Science and Education Reform (ICSSER 2018).
Atlantis Press.
Ruffin, R. J. (2017). Mill and Ricardo: The Genesis of Comparative Advantage. In 200 Years of
Ricardian Trade Theory (pp. 133-143). Springer, Cham.