Comparative Advantage: Critical Analysis of Economic Theories

This essay provides a critical analysis of the theory of comparative advantage, a fundamental concept in international economics. It explores the perspectives of key economists, including Schumacher, Palley, and Smith, on free trade and its benefits. The essay delves into the core principl...Read More

CRITICAL THINKING

Table of Contents
Critical Thinking..............................................................................................................................1
Theory of comparative advantages.............................................................................................1
References........................................................................................................................................4

Critical Thinking
Comparative advantage is the economical law that refers to the economic personnel ability to
produce goods and services at the lowest opening cost than any other economic personnel. In the
terms of Schumacher and Palley comparative advantage is the term related to widespread
concern of all over the world trade liberalisations. This includes the stability of capital and
labour, balanced trade, that are included or responsible for comparative productivity advantage
that result in price advantage, providing full employment. These advantages are stated in
Schumacher theory of comparative advantage whereas, Palley new trade theory is concerned for
international trades future impact on the national income and states that how the globalisation
can have its affect on the size and distribution of profits through trade in different countries.
Smiths international trade delivers same cause for all kind of trade, he states that trade has its
motive and when people trade with each other they have their own interest to gain benefits from
it otherwise would not pursue it.
Theory of comparative advantages
According to Schumacher, this theory states for the free international trade between
different countries. It dominates international economics and shows why free trade is beneficial
for different nations and for the whole world as well and how this free trade benefits to all. This
theory also concerns in favour of the poor countries to open markets to raise their standards of
living and join free trade authority. It is believed that through this process of trade relaxation will
help in maximising the global economic conditions from the theory of comparative advantage. In
the words of Schumacher this theory support and lies on the assumption that capital and labour
are not exchanged between the nations, as this theory is different from the assumption of
domestic trade(Schumacher, 2013). This theory implements that through this trading process it
will be advantageous for both the countries, though one nation will have production rate lower in
all goods and other will produce all the goods efficiently. In the study of Schumacher he states
that not only free trade will be beneficial for the nations, but it will be advantageous for the
nations as free trade leads to specialisation unintentionally accordance to comparative
advantages. This theory is adopted by neoclassical and modern formulation of free trade
legislatives, Neoclassical theory is completely based on marginal analysis and this economic
conditions determines that free international trade benefits to all the nations participating in the
process. This process benefits in the terms of comparative advantages by determining that if
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every nation specialises within accordance to this theory, then overall production increases and
there is availability of commodities in quantity in the participating nations(Schumacher, 2012).
According to Palley, the comparative advantages in modern theory has raised his concern
about future international trades impact on the national income of countries. His theory focuses
on the impact of globalisation that might affect in the distribution and size in profitability of
different countries trade. In this trade policy their analysis is incremented with the use of pure
trade theoretical work. It has opened new ways of trading that supports for the arguments that
relate to the growth benefits of trade between the nations(Palley, 2015).
As per the views of Smiths theory of international trade and in comparison with other
authors for the theory of comparative advantage, his original idea is based on historical
reconstruction. In the views of Smith, international trade is as same that cause in all kinds of
trade. For the benefits of the nations trade is for the consequence of trader to the extent of barter,
and exchange of goods or services for one another. These situations do not implements that
trade is done without any motive, to this contrary it is stated that whenever people trade among
each other they have their own interest for the same. They come into the process to gain from it,
or they would have not been in favour of pursuing it. Therefore, traders carry on the process
internationally so that they can earn profits through it. Moreover, Smith has shown that not only
an individual trader is benefited through the trade but in contrast to it whole society benefits from
international trade. In the views of Smith, his thoughts of division of labour shows the basis for
his theory of international trade. He states that the division of labour always leads to the
improvement in the production skills of labour(Palley, 2012). The more division of advanced
labour produces more output with the ratio of same number of labour. This division of labour
makes an effort to reach the improvements of quantity and quality of production. It is examined
that this benefits in the process of international trade and is beneficial for enhancing the skills of
workers and stimulates the development in technology. This contrast in promoting economic
growth and wealth of participating nations, this summarises that more skills or specialisation
results in more growth. According to Smith, international trade is advantageous for a country as
it gives value to the trade process by exchange of goods with other things that may satisfy their
needs. It also leads to enhance the division of labour that leads to increase of value exchanging of
the annual produced goods that results in increasing the population and wealth of the nation.
Smiths intention through his theory is to show that international trade is beneficial for all the
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nations who are involved in trade. He also concluded that trade is always not beneficial as in the
case of domestic trade is not beneficial to all the regions of the country, as in international trade
also creates differences if they differ in wealth.
It is critically concluded that the theory of comparative advantage has different
perceptions for different authors and the process of free trade has its value in different situations.
It focuses on free trade between nations to enhance relationships among them to gain
profitability from these trades.
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References
Palley, T. I. (2012). The rise and fall of export-led growth. investigación económica. 141-161.
Palley, T. I. (2015). The theory of global imbalances: mainstream economics vs structural
Keynesianism. Review of Keynesian Economics. 3(1). 45-62.
Schumacher, R. (2012). Adam Smith's theory of absolute advantage and the use of doxography
in the history of economics. Erasmus Journal for Philosophy and Economics. 5(2). 54-
80.
Schumacher, R. (2013). Deconstructing the theory of comparative advantage. World Social and
Economic Review. 83.
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