University Economics Essay: Comparative Advantage Analysis

This essay delves into the concept of comparative advantage within the realm of international trade, emphasizing the mutual gains derived from specialization among trading partners. It defines comparative advantage as a country's ability to produce a good or service at a lower opportunity cost than others, as initially proposed by David Ricardo. The essay then meticulously examines the diverse sources of comparative advantage, including the quality and quantity of production factors like labor and capital, geographical and climatic conditions, and the development of robust infrastructure. It further explores the influence of factors like exchange rate fluctuations, governmental trade controls (tariffs, quotas, subsidies), increasing returns to scale, the role of banking institutions in facilitating trade, and the importance of product design, innovation, and quality. The analysis underscores the dynamic nature of comparative advantage, highlighting that it can evolve over time, and concludes by emphasizing the significance of continuously improving and leveraging these sources to maintain and enhance a country's competitive edge in the global market.

Running head: ECONOMICS
Economics (Sources of comparative advantage)
Name of the University
Name of the Student
Author Note

1ECONOMICS
International trade means the process of exchange among different countries. This
exchange will be of capital, services or goods. Each trading partner enjoys mutual gains,
when they specialise in a particular good or service. Moreover, for this particular good or
service, the country faces either comparative advantage (Laursen, 2015). In other words, a
country will produce that product in which it has less opportunity costs. Hence, a country
enjoys comparative advantage when it can produce a particular good or service with a lower
cost compare to other countries. This theory is developed by David Ricardo. According to
him, a country’s welfare can be increased by applying this concept.
Comparative advantage is a changing process. It means that comparative advantage
can change over time (Levchenko & Zhang, 2016). Hence, it is important for a country to
find out various sources of comparative advantage.
Firstly, comparative advantage basically depends upon the quality and quantity of
chief production factors. Some countries have huge amount labour force and some countries
have huge amount of capital investment. Secondly, the chief reasons behind this comparative
advantage are geography and climate (Costinot, Donaldson & Smith, 2016). Due to these
differences, some countries enjoy low level of production costs compare to other countries.
Thirdly, a country can enjoy comparative advantage if it has developed infrastructure facility.
The government can invest huge amount of money to develop transportation and
communication service. This will further decrease the trade cost and will increase supply
capacity (Schilke, 2014). Information and communication technology helps a country to
enjoy comparative advantage in international trade by developing information oriented
sector.
There are some other important sources which are needed to analyse. Exchange rate
fluctuation influences the relative prices of imports and exports. Moreover, it can increase or

2ECONOMICS
decrease the total demand of a product from domestic and foreign customers. On the other
hand, governmental controls on import can be used to generate artificial comparative
advantage for domestic producers of a country (Beverelli, Fiorini & Hoekman, 2017). Some
tools that government use to control imports are tariffs, quotas and export subsidies and so
on. Moreover, increasing returns to scale of a company helps to raise its demand for any
commodity. Increasing return happens when output increase more than its proportional. This
increasing demand in market helps trade to take place. Therefore, increasing returns help a
company to become specialised and to enjoy comparative advantage. It should also be
mentioned that banking institutions are very important for a country to achieve comparative
advantage (Rappoport, Schnabl & Stern, 2014). Developed banking sector helps different
companies by granting loans and by providing export credits. Moreover, a good
governmental body also helps companies by providing legal facilities. Hence, good
institutions of a country help to increase comparative advantage. Lastly, product design and
reliability, innovation and quality increase the level of competition for a producer. There are
various countries that are now making comparative advantage to make knowledge industries
and specific knowledge sector with high quality.
There are some other self-reinforcing sources which help a country to increase
comparative advantage. Hence, by developing any one of the above sources or all sources, a
country can enjoy more comparative advantage (Schilke, 2014). As comparative advantage of
a country can change over time, it is called a dynamic process.
In conclusion it can be said that a country can enjoy comparative advantage for
various reasons. However, this comparative advantage may change over time. Hence, it is
important for a country to improve all sources for which it has comparative advantage.

3ECONOMICS
References:
Beverelli, C., Fiorini, M., & Hoekman, B. (2017). Services trade policy and manufacturing
productivity: The role of institutions. Journal of International Economics, 104, 166-
182.
Costinot, A., Donaldson, D., & Smith, C. (2016). Evolving comparative advantage and the
impact of climate change in agricultural markets: Evidence from 1.7 million fields
around the world. Journal of Political Economy, 124(1), 205-248.
Laursen, K. (2015). Revealed comparative advantage and the alternatives as measures of
international specialization. Eurasian Business Review, 5(1), 99-115.
Levchenko, A. A., & Zhang, J. (2016). The evolution of comparative advantage:
Measurement and welfare implications. Journal of Monetary Economics, 78, 96-111.
Rappoport, D. P. V., Schnabl, P., & Stern, C. E. P. N. Y. U. (2014). Comparative advantage
and specialization in bank lending. Discussion paper, London School of Economics
and New York University.
Schilke, O. (2014). On the contingent value of dynamic capabilities for competitive
advantage: The nonlinear moderating effect of environmental dynamism. Strategic
Management Journal, 35(2), 179-203.