International Economics Report: Comparative Advantage Difficulties

This report delves into the concept of comparative advantage, a cornerstone of international economics. It begins with an introduction to the term and its core meaning, highlighting the ability of an organization to produce goods and services at a lower cost than its trading partners. The report explores different models and theories of comparative advantage, including the classical theory of David Ricardo, which emphasizes increased consumption through trade and improved labor productivity. It then discusses the modern theories proposed by Deardorff and Shiozawa. The report also presents a practical example using Portugal and England to illustrate comparative advantage. The main body of the report then addresses the difficulties in adopting the idea of comparative advantage, focusing on the time-consuming nature of opportunity cost calculations, the lack of accounting principles for these costs, and the challenges posed by imperfect competition. The conclusion summarizes the key points, reiterating the importance of comparative advantage in international trade and the challenges associated with its implementation.

INTERNATIONAL
ECONOMICS
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Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
CONCLUSION...............................................................................................................................7
REFERENCES................................................................................................................................8
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INTRODUCTION
Comparative Advantage is the term which generally means organization is using option
which is having opportunity cost. This report highlights the concept of comparative advantage
by looking at different theory of model and example of the same given by Richardo’s. After that
report also highlights why this idea is difficult to be adopted by the different organization in
international market.
MAIN BODY
Comparative Advantage is the term which generally means a ability of the organization
to produce different goods and service at a lower cost as compare to that of a trade partner in the
nation. This law in the organization used to sell the product of the company at a lower price than
different competitor in the organization. Comparative Advantage is one of the biggest elements
which is seen by all the organization at the time of entering into international market for the
purpose of carrying out different operation in the international market (Davis and Dingel, 2020).
Concept of Comparative advantages
Key to understand the comparative advantage is to understand the concept of opportunity
cost, opportunity cost is generally known as a benefit which that someone in the organization
looses when selecting a particular option to go on with the same in the market. Generally the
company with the lower opportunity cost in the market is the one who used to enjoy the benefit
of comparative advantage in the market. Another way of understanding the concept of
competitive advantage is to option given a trade-off. This can be understood by comparing two
different option trade off, the one with the best overall package is comparative advantage.
In simple words it can be said that comparative advantage in the market generally means
a free trade , an agent will produce of and consumer less of a good in the market (Rendall,
2017).
Looking at the concept of comparative advantage in term of two countries trading with
each it has been seen that David Ricardo has developed the classical theory of comparative
advantage in the year 1817. In the theory David Ricardo it has identified that when two
companies used to trade with each other in the market will eventually increase its overall
consumption of the different services which is offered by all both the company in the
organization, reason behind the same is identified that with the help of trade in between two
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nation is to improve the labour productivity in between two nation. As there are different
presence of skill set among different human power of different nation this eventually used to
increase the productivity of different country and this will eventually help both the nation in
seeing good amount of presence of money in both the nation (Levchenko and Zhang, 2016).
Comparative advantage theory generally used to say that if one country organization is able to
get the product at more cheaper rate as compare to local market, or simple words it can be said if
organization used to get some sort of benefit by procuring the different material from different
nation than organization which used to get the advantage is indulging competitive advantage
theory.
Different theory of Comparative advantage
There are many different type of the theory which are also proposed in context of
competitive advantage one of such theory is modern theory of competitive advantage. Deardorff
are the one who has possessed new completive advantage law. This law explain that
comparative advantage is very difficult to implicate that this are not applied on the individual
commodity, it generally requires a multiple commodity to be there to apply the concept of
Comparative advantage. Also this law used to specify that comparative advantage can remain
valid in the organization the organization if the theories in the organization are restarted in term
of average across all commodities. Model possess by Deardorff’s used to pass on the insight to
different correlation between vectors of the trade and vector with relative-autarky-price
measures of comparative advantage. Summarizing the general law of comparative advantage it
has been find out that it is the modal which used to incorporate multiple goods and also takes
account the variety of the factor such as transportation costs, and other obstacles to trade
(French, 2017).
Another Alternate approach of comparative advantage is the theory which is possess by
Y. Shiozawa. As Y. Shiozawa was succeeded in developing the international value in the
tradition of Ricardo. This theory was based upon variety of assumption. As per the new theory
no physical criterion is generally used to exist in the organization. Competitive pattern in the
organization by the trader trials to find cheapest product in the world. This can be achieved by
the organization by taking help of world optimal procurement. In simple word it is theory which
used to explain the global supply chain are formed.
Example of Empirical Approach
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Ricardo has provided a famous example which used to consist of two countries that are
Portugal and England. Each economy are producing two goods of identical quality in the nation.
But the cost of producing that good in the organization used to differ between two nation.
Hours of work necessary to produce one unit
Produce Country Cloth Wine
England 100 120
Portugal 90 80
This example used to show that England generally used to commit 100 hours of labor to produce
one unit of cloth or 5/6 unit of wine in the organization. At the same time Portugal used to
commit 90 hour of the labor to produce one unit of cloth or 9/8 unit of wine in the organization.
So by looking at the example the Comparative advantage of using Portugal as compare to
England in the nation.
Reason why it is considered as difficult idea
From the above analysis it is clear that the comparative advantage is very essential for
the economy and the person doing business. But then also there is a lot of major difficulty in
expanding the idea over the comparative advantage (Zénon, Devesse and Olivier, 2016). It is so
because of the fact that opportunity cost gives a comparative advantage for the company. The
major difficulty in the idea of the opportunity cost and the comparative advantage is the time.
This is majorly because of the fact that if the opportunity cost is that it takes a lot of time in
managing the cost and calculating the cost as per the requirement of the working in the
company. This is also because of the reason that for calculating the cost of opportunity left for
selecting the first option takes a lot of time and this involves the fact that the it takes a lot of time
in taking the decision that which option to take for the cost of opportunity.
But on the other side another major difficulty is that it has no accounting principle or rule
being made for the opportunity cost and its calculation. The opportunity cost is very essential in
the effective decision making but then also there are not much provision being made for the
accounting of this cost in the accounts or at the calculation of the profits if the company
(Shavandi, Pirnia and Fuller, 2019). The company considers the different project which can be
used by them in order to manage the business. Thus, for this the company needs to evaluate the
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entire project and then they have to select the one option and the rest options are not used. Thus,
this is the opportunity cost but there is not provision in terms of accounts and profit for the
company if that option was selected (Gao, Chen and Shi, 2017).
The other major difficulty being faced by the companies at time of managing the
comparative advantage for the company is that this is not much flexible that is two options
cannot be selected at a time and the company need to mainly focus on the single option. Thus,
the company cannot decide the comparative advantage which is given or provided by the
different options. Thus, this can create confusion for the company that which option is more
effective and profitable by the company in gaining more of the profits.
In addition to this the major drawback or difficulty in managing the comparative
advantage of the company is that they are unable to the conceptualize all the different benefit of
the various different options which are available for the company. This is majorly pertaining to
the fact that if the company will not be having knowledge of the different option in proper and
effective manner then the company will not be able to calculate the comparative advantage of
various options being available. Thus, for this the most important thing is to have a clarity of the
concept of all the different options from which the company need to select a single option and
had to ignore the rest of the options.
Another major difficult idea at time of calculating the comparative advantage is the
imperfect competition and this is the major reason behind the comparative advantage. This is
majorly because of the reason that when it comes to managing the different options available to
the company. But the major disadvantage of this is that the competition within the market is very
high and all the similar companies to have some or the other advantage. Thus, for this it is
necessary that the company evaluates all the different options in proper and effective manner.
This is due to the fact that one option which is beneficial for the company may be possible that it
is not good for the other company (Roychaudhuri and Bandyopadhyay, 2018). Thus, for this it is
very important for the company to evaluate all the various different options in effective and
efficient manner. This is necessary to ensure that the company select the best suited option for
the company so that it will not regret the opportunity cost of the losing the other options for the
selection of the first options.
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CONCLUSION
After going through report it has been concluded that Comparative Advantage is the term which
used to determine the ability of the organization to produce different goods and service at a
lower cost as compare to that of a trade partner in the nation. There are many different theories
which are given by author for the same. In the end report conclude why this is difficult to use
this concept.
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REFERENCES
Books and Journals
Davis, D. R. and Dingel, J. I., 2020. The comparative advantage of cities. Journal of
International Economics, p.103291.
French, S., 2017. Revealed comparative advantage: What is it good for?. Journal of
International Economics. 106. pp.83-103.
Gao, S., Chen, W. and Shi, L., 2017. A new budget allocation framework for the expected
opportunity cost. Operations Research. 65(3). pp.787-803.
Levchenko, A.A. and Zhang, J., 2016. The evolution of comparative advantage: Measurement
and welfare implications. Journal of Monetary Economics. 78. pp.96-111.
Rendall, M., 2017. Brain versus brawn: the realization of women's comparative
advantage. University of Zurich, Institute for Empirical Research in Economics, Working
Paper, (491).
Roychaudhuri, P.S. and Bandyopadhyay, S., 2018. Financial Pinch Analysis: Minimum
opportunity cost targeting algorithm. Journal of environmental management. 212. pp.88-
98.
Shavandi, H., Pirnia, M. and Fuller, J.D., 2019. Extended opportunity cost model to find near
equilibrium electricity prices under non-convexities. Applied Energy. 240. pp.251-264.
Zénon, A., Devesse, S. and Olivier, E., 2016. Dopamine manipulation affects response vigor
independently of opportunity cost. Journal of Neuroscience. 36(37). pp.9516-9525.
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