International Trade: Theory of Comparative Advantage and Case Study of United Kingdom

This essay analyses the real-world relevance of the Theory of Comparative Advantage in the context of the trade dynamics of the United Kingdom. It discusses the shift in the export basket of the country from manufacturing and subsistence commodities to different service-related activities, which can be explained by the shift in the comparative advantage of the country in the recent period.

Running head: INTERNATIONAL TRADE
International Trade
Name of the Student
Name of the University
Author Note

1INTERNATIONAL TRADE
Introduction
The economy of the world as a whole as well as the economies of the countries across
the globe have experienced considerable dynamics and modifications over decades, much of
which can be attributed to the international events like Globalization and trade liberalizations
across the globe, which in turn have contributed in making the global economic and
commercial environment more integrated and inclusive, with the countries becoming more
interconnected with one another in the contemporary period.
This has resulted in developing the global trade activities significantly over the years.
The term “trade” implying the action of exchanging different goods and services between two
or more individuals, regions or countries per se, has gained significant importance and multi-
diversity in its notion and perception across the countries over the years. With Globalization,
Liberalizations, increase in product diversities as well as technological and infrastructural
innovations, trade activities have been increasing considerably across the globe and the
modes, nature and magnitude of trade have also been changing from simple to multi-
dimensional forms.
In this context, there have been significant research and developments of trade
theories over the years and with time more inclusive and relevant theories have developed
from the limitations of the simpler ones, of which the most popular and globally accepted one
has been that of the theory of Comparative Advantage proposed by David Ricardo (Yürekli).
The concerned essay, keeping the assertions of this trade theory into consideration, tries to
analyse the real-world relevance of the same, in the context of the trade dynamics of one of
the major influential and commercially active economies in the globe, the economy of United
Kingdom.

2INTERNATIONAL TRADE
Trade Theory of Comparative Advantage
The theory of Comparative Advantage, in the domain of international trade, came into
existence following the limitations of its predecessor, The Absolute Advantage Trade Theory,
proposed by Adam Smith. The Absolute Advantage Theory asserted that the countries should
produce and trade those commodities or services in which the they have absolute advantage
over other countries, that is, in which using the same amount of productive resources they
could produce greater quantity than the other countries (Bowen, Hollander and Viaene 2012).
However, the theory did not take into account the real-world instances in which often
one country enjoys productive efficiencies in all the products over its partner countries,
thereby nullifying trade possibilities among the countries in concern. Taking this into
account, Ricardo’s Comparative Advantage theory emphasized on the concept of
“Opportunity Cost” of production, which is the cost of production of one extra unit of a
commodity, measured in terms of the amounts of other commodities which have to be
sacrificed for the same (Cuñat and Melitz 2012). Keeping the notion of opportunity cost of
production in consideration, the comparative advantage theory suggests that the countries
should concentrate in the production and export of those commodities and services in which
they have low opportunity cost of production as compared to their trading partners and should
import those in which the opportunity cost of production is high. As per the assertions of the
theory, by doing so, the productivity of each country is expected to increase, which in turn is
expected to increase the global productivity (Wagner 2012).
Example: If in a two country two commodity scenario, Country A can produce one extra unit
of Commodity 1 by sacrificing less of Commodity 2, compared to that of the loss which is
experienced by Country B in producing one additional unit of Commodity 1, then Country A

3INTERNATIONAL TRADE
is said to have lesser opportunity cost and a comparative advantage in the production of
Commodity 1 over that of the Country B. On the other hand, if the opportunity cost of
production of Commodity 2, in terms of loss of Commodity 1 for one additional unit of
production of Commodity 2, over that of Country A, then Country B is said to have a
comparative advantage over Country A in the production of Commodity 2. In such a
scenario, it is beneficial for Country A to produce Commodity 1 only and for Country B to
produce Commodity 2 only and then exchange with one another. This in turn helps in
increasing the total production of both Commodity 1 and Commodity 2, using the same
amount of productive resources present in total.
The above discussed theoretical assertions and its real-world relevance can be
analysed by tallying the same in the light of the trade dynamics in the United Kingdom over
the years.
Comparative Advantage: Case study of United Kingdom
As discussed above, being one of the most industrially developed and economically
progressive economies in the global scenario over centuries, the economy of United Kingdom
has experienced huge dynamics and shift patterns over the years and enjoys a hugely
developed and multi-dimensional trade sector in the current times. The country has developed
long term and varied commercial connections with all the major economies over years and
have reaped the benefits of such trade connections and their own comparative advantages in
production and international supply of certain commodities and services over the years. The
contribution of the trade activities in the economic growth of the country can be seen as
follows:

4INTERNATIONAL TRADE
Figure 1: Share of trade activities in the Gross Domestic Product of the country (2001-2016)
(Source: Ec.europa.eu 2018)
The considerably and consistently high percentage of the contribution of the
commercial and international trade activities of UK in its GDP, in turn indicates towards the
importance of the sector in the growth of the country and its economy over the years. The
country has been experiencing huge increase in its imports compared to that of the exports of
the same, over the years, which can be attributed to the reduction in the free trade barriers in
the country over the years, in the form of reduction of import tariff as can be seen from the
following figure:

5INTERNATIONAL TRADE
Figure 2: Reduction in the rate of import tariff in UK over the years
(Source: Wits.worldbank.org 2018)
This in turn has led to the increase in the imports in the country with time. The trade
pattern of the country is also seen to be experiencing a visible shift in the aspects of the types
of commodities which are exported by the concerned country (Bown and Crowley 2013). The
country has been experiencing a shift in the export products from primarily low-end
manufacturing and basic commodities to that of high end technological commodities and
professional services as can be seen from the following figure:

6INTERNATIONAL TRADE
Figure 3: Value of exports of the top export commodities of the country over the years
(Source: Comtrade.un.org 2018)
As is evident from the above figure, the export of the commodities of the country,
which used to experience huge outflow to other countries, including gold, animal blood for
therapeutic use, alcohol and others, have been decreasing in the current period (Costinot and
Donaldson 2012). However, the automobile sector of the country has been experiencing
considerable increase in the amount of exports in the last few years as is evident from the
above figure.
The contemporary structure of the export market of the country mainly consists of
different professional services and high technological products, the share of each being seen
from the following figure:

7INTERNATIONAL TRADE
Figure 4: The contribution of different service sector in export dynamics of UK
(Source: Comtrade.un.org 2018)
As is evident from the above figure, the country has been experiencing huge increase
in the services like that of travel, transport services, commercial and financial services as well
as in the domain of provision of insurance services, in the contemporary period. Thus, it can
be asserted that with time the export of manufacturing and subsistence commodities from UK
has been decreasing and the country is relying more on other countries for the imports of such
commodities. On the other hand, the share of the service sector components has been
increasing in the export basket of the country (Laursen 2015).
The increasing share of imports, especially of the manufactured and agricultural
commodities, along with a shift in the components of export basket has led to dynamics in its
trade balance, with an increase in the balance of trade in the service sector (with greater
export and less import) and a decrease in the trade balance in the commodity sector (with
greater import and low export), which can be seen from the following figure:

8INTERNATIONAL TRADE
Figure 5: Service sector balance, commodity sector balance and total trade balance of UK
(Source: Ons.gov.uk 2018)
Logical Interpretation
From the above discussion, it can be seen that the United Kingdom has been
experiencing a c considerable shift in its export dynamics, with the pattern of export shifting
from the manufactured commodities to different professional, financial and technological
services. This can be attributed to the shift in the development of the productive resources
which in turn is shifting the comparative advantage of the country (Levchenko and Zhang
2016). With time the country has been developing into a capital-intensive country from low
skilled labour intensive one, which in turn led to the decrease in the opportunity cost of
production of the capital-intensive products and services and an increase in the opportunity
cost of production of the labour-intensive ones. This in turn explains the increase in the
export of services and import of basic and manufacturing commodities, which in turn shows

9INTERNATIONAL TRADE
the comparative advantage enjoyed by the contemporary UK economy in the service sector
production and supply.
Conclusion
From the above discussion it can be asserted that the Theory of Comparative
Advantage, being one of the most popularly and widely used theories in the domain of
international trade, still has considerable relevance in the contemporary global trade and
commercial dynamics as can be seen from the implications of the same in the decision
making aspects of the producers of the different countries regarding what to produce and
export and what to import in exchange to maximize economic benefit of the countries and the
world as a whole. This can be seen to be applicable from the trade scenario of United
Kingdom, which, over the years is seen to experience a shift in its export basket, from
manufacturing and subsistence commodities to different service related activities, which can
be explained by the shift in the comparative advantage of the country in the recent period.

10INTERNATIONAL TRADE
References
Bowen, H.P., Hollander, A. and Viaene, J.M., 2012. Applied international trade. Palgrave
Macmillan.
Bown, C.P. and Crowley, M.A., 2013. Import protection, business cycles, and exchange
rates: Evidence from the Great Recession. Journal of International Economics, 90(1), pp.50-
64.
Comtrade.un.org (2018). Download trade data | UN Comtrade: International Trade
Statistics. [online] Comtrade.un.org. Available at: https://comtrade.un.org/data [Accessed 23
Apr. 2018].
Costinot, A. and Donaldson, D., 2012. Ricardo's theory of comparative advantage: old idea,
new evidence. American Economic Review, 102(3), pp.453-58.
Cuñat, A. and Melitz, M.J., 2012. Volatility, labor market flexibility, and the pattern of
comparative advantage. Journal of the European Economic Association, 10(2), pp.225-254.
Ec.europa.eu (2018). Home - Eurostat. [online] Ec.europa.eu. Available at:
http://ec.europa.eu/eurostat [Accessed 23 Apr. 2018].
Laursen, K., 2015. Revealed comparative advantage and the alternatives as measures of
international specialization. Eurasian Business Review, 5(1), pp.99-115.
Levchenko, A.A. and Zhang, J., 2016. The evolution of comparative advantage:
Measurement and welfare implications. Journal of Monetary Economics, 78, pp.96-111.
Ons.gov.uk (2018). UK trade - Office for National Statistics. [online] Ons.gov.uk. Available
at: https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/
november2017 [Accessed 23 Apr. 2018].

11INTERNATIONAL TRADE
Wagner, J., 2012. International trade and firm performance: a survey of empirical studies
since 2006. Review of World Economics, 148(2), pp.235-267.
Wits.worldbank.org (2018). World Integrated Trade Solution (WITS) | Data on Export,
Import, Tariff, NTM. [online] Wits.worldbank.org. Available at: https://wits.worldbank.org/
[Accessed 23 Apr. 2018].
Yürekli, S., International Trade Theories.