International Trade: Comparative Advantage in the UK Economy Report

This report examines international trade and its impact on the UK economy, emphasizing the concept of comparative advantage. It explores how the UK, as a highly developed and market-oriented economy, leverages its strengths in financial services, aerospace, and pharmaceuticals to engage in in...Read More

Running head: INTERNATIONAL TRADE AND OPEN ECONOMY
INTERNATIONAL TRADE AND OPEN ECONOMY
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Introduction
International trade is one of the most important parameters for economic growth. The
theory of comparative advantage forms the basis of international trade which describes that
countries take part in international trade and export goods in which they have a relative
comparative advantage in production. The theory has been proposed by David Ricardo in 1817
that incorporates the concept of opportunity cost (Mankiw 2016). Comparative advantage is
gained when economies are able to produce goods by using fewer resources at lower opportunity
costs. International trade has a pivotal role in the generation of economic profits in United
Kingdom due to a gain in comparative advantage in production.
UK is one of the most globalized economies in the world which is highly developed and
market oriented. The economy is renowned as one of the top exporters of goods and services in
the world and ranks among the top five importers. More than half of imports and exports of UK
are engaged with European Union which serves as one of the most efficient trade partner (Curtis
2018). Therefore, it is important to evaluate the structure of international trade with respect to
comparative advantage that enables the export of goods and services in UK.
Discussion
The trade to GDP value generates about half of country’s GDP. The volume of
international trade has significantly improved in the past few years. UK exports several goods in
the international markets (Geels et al. 2016). The goods that are exported by UK are automobiles
turbo jets, computers cars, mechanical machinery, aircraft, miscellaneous manufacturers, medical
or pharmaceutical products, financial services respectively. About one-tenth of food items and
related stuffs are imported from other economies. Machinery and transport equipment are also

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imported that serves as one-tenth of the total imports. The UK market is highly dominated by
service sectors that generates over 80- percent of the total GDP including the value of both
imports and exports respectively.
Structure of UK economy with respect to international trade
The financial service sector is another sector in which the economy has a comparative
advantage. London has one of the biggest financial centers in the world that provides financial
services to several companies. Another big industries in UK are aerospace and pharmaceutical
industry that gives them a comparative advantage in production. The economy has more than
164.2 billion dollars in foreign reserves and generates more than 1.04 trillion dollars. UK is
ranked as the sixth largest economy in terms of Gross National Product. The economy ranked
22nd in terms if per capita GDP that comprise of 3.3 percent of the world’s GDP (Browne and
Immervoll 2017). It has a well-structured trade system that is effectively run and managed by
effective production techniques that has enabled them to gain a level of comparative advantage
in production.
The role is to change the way goods are being produced and served in the economy with
respect to change in overall aggregate market effect and outcomes as per the structure of
international trade. The trading system of UK is organized in a manner that effectively improves
the performance of other economies. UK has actively understood its areas of comparative
advantage and traded with economies for goods in which it has a comparative advantage in
production (Dhingra et al. 2016). In order to understand the effectiveness of comparative
advantage in international trade, it is important to get acquainted with the trade theories for an
effective analysis of trade structure of United Kingdom.

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Theory of comparative advantage
Comparative advantage allows an economy to sell goods at low price and attract huge
sales in the international markets. Comparative advantage is a fundamental tool used in
international trade such that all economies can benefit from voluntary trade and cooperation. The
theory is closely related to opportunity costs where opportunity cost is defined as the cost of the
next best alternative. It is the value of potential benefit that economies or individuals tend to miss
out while choosing one good over another (Witt and Jackson 2016). Trade or export of goods is
beneficial only if it is produced at lower cost by using few resources, capital, advanced
technology, skilled labor, capital and labor intensive approaches (Watson 2017). This approach
affectively leads to the theory of specialization. The company with lower opportunity cost can
sell goods at lower price that will effectively improve the level of exports and demand for the
product.
Figure 1: Trend in the goods trade balance of UK in the past five years

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Source: (Tradingeconomics.com. 2020)
The trade balance has effectively improved after the effective utilization of comparative
advantage as shown in Figure1. UK has a comparative advantage in the provision of financial
and other services. A remarkable growth has been faced by the service sectors that comprise a
range of industries in it such as retail, financial, leisure, cultural and business administration. The
economy has innovative financial services that allows firms to invest money in stocks and bonds
(Levchenko and Zhang 2016). They also provide huge amounts of loan to foreign companies for
extracting profits by the process of foreign direct investment that allows firms to open companies
in other economies and regulate them indirectly. They have an advanced insurance market that is
regulated by well-organized IT and telecommunication systems.
The theory of comparative advantage also incorporates an important factor such that
countries will produce more and consume less of those goods in which it has a comparative
advantage in production such that they able to export more instead of selling it in the domestic
market (Curtis 2018). Sales by retailers has effectively improved the structure of UK economy
which deals in the sale of finished products to end user consumers and retail chains are both
publicly traded on the stock exchange as well as privately owned. The performance of the retail
sector ensures the level of economic activities in the economy that is improved in order to gain a
comparative advantage.
Ways of gaining comparative advantage and concept of specialization
Comparative advantage in UK can be gained by several ways if the economy doesn’t
have much natural resources to support the sector. An abundance of resources does make the
sector have a level f advantage, but is not necessary for the study of comparative advantage. This

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can be gained from technological efficiency, more advanced and researched about market, new
methodologies for business, skilled labors, economic stability and having capital efficiency.
The economy has abundant resources like coal, petroleum, durable land and other
minerals that allows them to sell quality oil and related goods at low prices. The main export
partners of UK are European Union, United States, Netherlands, France, Ireland, China,
Switzerland, Belgium, Spain and Italy (Jiborn et al. 2018).
Apart from this, UK is a highly advanced economy where the level of education is very
high and labors are highly skilled that enables them to make machinery and computers at a lower
cost than the other economies. An economy does not imports the good which it cannot make, but
imports those goods whose cost of production is comparatively higher in UK than they do in
other economies. They effectively follow the theory of specialization where they concentrate on
becoming an expert in the production of certain goods with respect to a particular skill.
The retail sector is efficiently structured in UK which is totally driven by advanced
technological system that enables consumers to stay connected with the digital lifestyle and
allows the development of other sectors like food, clothing, electronics, accessories, medical
necessities and a range of products that is needed on a regular basis (Hinsley et al. 2016). The
sector has a high level of efficiency due to optimization of the warehouse, conduction of stock
checks on a daily basis, selection of order data previously, getting involved in cross
merchandising, reporting in store sales, incorporating sales channel to review profit margins and
ensure a correct stock level for effective sales.
Heckscher- Ohlin (H-O) theory of International Trade

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The H-O trade theory defines the pattern of international trade with respect to land, labor
and capital endowments of the economies. It explains that economies would have a relative cost
advantage in the production of goods that maximize the usage of relatively abundant factors of
production. Countries export those goods which they can produce efficiently in bulk amounts as
per the availability of resources and varying specialties of the economies.
The market for international trade is estimated by a change in aggregate trade of goods
and services with respect to market effective policies and factors of production that are most
abundant. The model not only illustrates the effectiveness of tradable commodities but factors
like that of labor. Labor and capital cost differ in each economy as per their abundance (Crowley,
Exton and Han 2018). A country that has labor in excess amounts must use labor intensive
production technique to produce the good in huge amounts at a relatively lower price as the labor
price becomes cheaper.
Economies with less labor and more capital, apply capital intensive production
techniques that enables them to provide more goods at less time and price. However, there is a
contradictory parameter in the model because labor intensive techniques require skilled labor that
raises the labor and production cost effectively. Capital intensive approach can increase the
production cost and lower the economic profits (Ottaviano, Peri and Wright 2018). This is
because rise in labor cost enhance the marginal productivity of the labors. This will effectively
enhance the level of economic profits with respect to effective policies and outcomes.

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Figure 2: Trend in the value of exports in UK in the past ten years
Source: (Tradingeconomics.com. 2020)
The level of exports has effectively improved in UK due to the gain of comparative
advantagee in the mentioned sectors. The imports machines, equipment, tools and related
products in order to produce turbo jets, cars and other technical products which is then exported
to other countries (Mulabdic, Osnago and Ruta 2017). This is how UK uses the theory of
comparative advantage in extracting pure economic profits.
Advanced economies use a combined model of capital and labor intensive approaches.
Capital intensive approach is dominated by the skilled labors where less capital and labor and
produce quality goods in bulk amounts in lesser time frame (Morris, Murray and Murphy 2016).
Economies are benefitted as they import resources they does not have as it helps to take the
advantage of elastic demand.
UK effectively uses a capital intensive method of production that uses advanced
production techniques and capital that is managed by skilled labor force. UK is relatively labor

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abundant in comparison to other economies as there is plenty of skilled labor that makes
effective usage of capital intensive techniques. This is why UK exports more of cars,
machineries, equipment, aircraft and miscellaneous manufacturers that is solely dependent on
effective capital endowments. It exports huge amounts of crude oil as it uses a good mix of oil
origins from the North Sea oil refineries (Borchert and Tamberi 2018). The service industries of
UK hold more than 80 percent of the total net capital stocks that can effectively improve the
performance of the service sectors. Yet, UK has a current account deficit that has persistently
stayed for the past 15 years due to increased imports which is now improving due to increased
trade.
Conclusion
Therefore, it can be concluded that comparative advantage is effective for extraction of
huge profits while engaging in international trade. The theory explains how UK uses its
resources efficiently to produce and export goods that has low production costs with respect to
other economies. UK can make cars, computers, turbo-jets at low cost due to availability of
skilled labor force. They effectively import goods like equipment, tools which is needed to
produce the export goods as they can import them at low prices than to produce them. That is
why they follow a labor intensive approach that uses skilled labor to operate the capital goods.
The economy has a good retail and financial sector that uses digitalized platforms to serve the
needs of the customers by using the skilled labor force.

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