ECON 3538 - Analysing UK Trade Dynamics Using Comparative Advantage

This report analyses the trade dynamics of the United Kingdom through the lens of the Comparative Advantage Theory. It examines the shifts in the UK's trade sector, highlighting the transition from manufacturing commodities to services. The analysis covers the country's export and import activities, trade relations, and the impact of factors like globalization and tariff rates. The report identifies the UK's comparative advantages in the service sector and disadvantages in commodity production, leading to a negative overall trade balance. The study uses various figures and data to support its findings, providing a comprehensive overview of the UK's trade landscape and its changes over time. Desklib provides access to a wide range of academic resources, including past papers and solved assignments.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

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Introduction
The global economic framework has experienced considerable dynamics over the
centuries owing to the changes and traits in the economic activities across the globe. Much of
these changes and development of the economic scenario across the globe, as it is in the
contemporary period, can be attributed to the international phenomena like Globalization as
well as to the country specific economic dynamics and policy frameworks (Gopinath,
Itskhoki, and Neiman 2012). Over the years, Globalization as well as liberalization of the
trade and industrial sectors of the countries across the globe, clubbed with the technological
and infrastructural advancements has led to greater integration and inclusiveness in the global
economic framework.
Owing to these dynamics, the global commercial and trade dynamics have also
changes considerably. The above-mentioned phenomena have considerably facilitated setting
up of intra as well as inter-country trade connections among the economies across the globe
(Hanson 2012). This in turn has resulted in significant changes in the modes of trade as well
as the nature of the goods and services exchanges among the different countries in the current
multidimensional and multilateral global commercial scenario.
Given this scenario, the trade theories have also developed considerably in the
economic theoretical framework and these theories have considerable practical relevance
with the trade relations and activities of the countries in the contemporary scenario. Keeping
this into consideration, the concerned essay tries to analyse the trade dynamics of the United
Kingdom under the theoretical framework of the “Comparative Advantage Theory” of
international trade, thereby analysing the sectors in which the country enjoys trade
advantages and in which it is comparatively disadvantages, which in turn shows the trade
balances of the country.

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Comparative Advantage Theory
To understand the trade scenarios and dynamics faced in the commercial and trade
sectors of the concerned country, United Kingdom, it is of utmost importance to elaborate the
theoretical framework in the international trade scenarios which in turn is expected to help in
understanding the advantages and disadvantages arising out of the international trade in the
United Kingdom and also in analysing the industry specific trading trends of the country with
its trading partners and the changes in the same with time (Feenstra 2015). In this context, the
most popular and robust trade theory exiting in the economic conceptual framework is that of
the theory of “Comparative Advantage” in trade, as proposed by David Ricardo.
The Comparatively Advantage theory highlights the concept of opportunity cost in
production of commodities and services. According to the assertions of the theory,
opportunity cost refers to the cost of one additional unit of a commodity in terms of the
number of other commodities the production of which has to be foregone in producing the
additional unit of the former commodity (Levchenko and Zhang 2016). According to the
theory, a country should thus produce those commodities in which they have to incur less
opportunity cost and exchange these commodities with those produced by other countries in
which the opportunity cost of production is higher for the concerned country. According to
the assertions of the Comparative Advantage Theory, trading in this method can help in
increasing the total global output as well as individual welfare of each of the trading partner
countries (Laursen 2015).
Trade Dynamics in the United Kingdom: Comparative Advantages
Keeping the theoretical assertions of the Comparative Advantage Theory into
consideration, this section of the essay tries to discuss the trade dynamics in the United
Kingdom. Being one of the most developed and industrially and commercially sound

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economies in the global scenario, the country has experienced considerable development and
modifications in its trade sector with time, setting up long term and sustainable widespread
commercial relationships with almost all the significant economies of the world.
In the current scenario, the country has experienced considerable dynamics with the
changes in the nature of goods and services produced and consumed within the country as
well as with the changes in the preferences of international population. The trade sector of the
country comprises a significant share of the Gross Domestic Product of the country, over the
years, which can be seen from the following figure:
Figure 1: Share of the trade sector in the GDP of the United Kingdom over the years
(Source: Ec.europa.eu 2018)
The considerable share of this sector in the total economic output of the country in
turn indicates towards the extreme importance of the trade sector in the economic growth of
the country over the years (Wagner 2012). The trade dynamics however, is consisted of both
export as well as import activities as the country not only exports commodities and services
but also imports a considerable amount of their consumption commodities, with the volume

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of the same increasing over the years, which can be shown with the help of the following
figure:
Figure 2: Volume of exports and imports in UK over the years
(Source: Ec.europa.eu 2018)
As is evident from the above figure, over the years the volume of imports has
increased considerably in the United Kingdom, while the exports have faced fluctuations, the
general trend showing moderately positive dynamics. The exports have however decreased to
some extent in the last couple of years. The increase in the imports of the country can be
attributed to several reasons, of which the primary ones being an increase in the demand of
products which are not produced in the country and also the decrease in the import tariff rates
of the country, which can be seen from the following figure:

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Figure 3: Changes in the import tariff rate in the United Kingdom
(Source: Wits.worldbank.org, 2018)
From the above figure it is evident that the country has over the years reduced the
import tariff rate considerably to facilitate imports of goods and services. This has been done
by the country also to build up robust relationships with the other trading partners in the
global scenario. This in turn has facilitated the increase in the amount of imports in the
country over the years.
The primary countries with which the United Kingdom maintain sustainable trading
relations, both export and import, can be seen from the following figures:

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Figure 4: Export relations of the UK
(Source: Workman 2018)
Figure 5: Import relations of the UK
(Source: Workman 2018)
In fact, the amount of import of the country has been increasing faster than that of the
amount of exports with time, thereby giving rise to negative trade balance, which is
calculated by deducting the valuation of imports of a country from that of the volume of

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exports of the same. Over the years there has been a significant decrease in the exports of
commodities and final consumption of goods, which can be shown with the help of the
following figure, showing the changes in the exports top ten products, which the country used
to export to other countries:
Figure 6: Values of top export commodities of UK
(Source: Comtrade.un.org 2018)
As is evident from the above figure, the commodities which used to form a
considerable share of the export basket of the United Kingdom, has been decreasing
considerably with time, thereby indicating towards the fact that the country has been
experiencing a decrease in the comparative advantage in its commodity sectors, especially in
the sectors like gold, oil and minerals, crude oils. However, there has been moderate increase
in the exports in the automobile manufacturing sector of the country.
However, the country at the same time has been experiencing an increased demand in
the international scenario especially of the different components of the service basket which

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it produces and exports (Pelling 2016). The country has been emerging as one of the primary
countries experiencing considerable success in the exports of the different services which
primarily include the travel and tourism industry, business and financial services, services
provided by the insurance sectors along with services in the information technology,
communications and also media and design. The share of the different services in the service
export basket of the country can be seen as follows:
Figure 7: Share of different service industries in the export basket
(Source: Comtrade.un.org 2018)
UK however, also exports several services which can be shown as follows:

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Figure 8: Services imported by the UK
(Source: Comtrade.un.org 2018)
Given the current scenario the trade balance of the country in terms of goods as well
as in terms of services can be shown with the help of the following figure:
Figure 9: Balance of Trade of UK over the years
(Source: Ons.gov.uk 2018)

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From the above figure it can be seen that the trade balance of the country in terms of
commodities and consumables has been decreasing due to the increased imports of these
commodities. On the other hand, the trade balance of the service sector has been seen to be
positive due to the increase in the relative share of export over import of the same in the
country (Gibson and Thirlwall 2016). However, the share of negative trade balance in the
commodity producing sector outdoes that of the share of negative trade balance of the service
sector of the country.
Nevertheless, the country can be asserted to enjoy a comparative advantage in the
service sector, with increasing exports over imports in the same while UK has been
considerably losing its comparative advantage in the production of different commodities,
especially in the manufacturing sector with time, as can be seen from the increased imports in
these sectors (Yarbrough and Yarbrough 2014).
Conclusion
From the above discussion it can be asserted that the United Kingdom, being one of
the most dynamic and robust economies in the global scenario, has experienced considerable
fluctuations in their trading scenario with a shift in the comparative advantage of the
production and exports of the country from the manufacturing commodities to that of the
different services including hospitality, tourism, health and others. However, the overall trade
balance of the country is seen to be negative, given that the share of negative trade balance of
the commodity sector is higher than the positive trade balance of the service sector of the
country.

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References
Comtrade.un.org (2018). Download trade data | UN Comtrade: International Trade
Statistics. [online] Comtrade.un.org. Available at: https://comtrade.un.org/data [Accessed 11
Apr. 2018].
Ec.europa.eu (2018). Home - Eurostat. [online] Ec.europa.eu. Available at:
http://ec.europa.eu/eurostat [Accessed 11 Apr. 2018].
Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton
university press.
Gibson, H.D. and Thirlwall, A.P., 2016. Balance-of-payments theory and the United
Kingdom experience. Springer.
Gopinath, G., Itskhoki, O. and Neiman, B., 2012. Trade prices and the global trade collapse
of 2008–09. IMF Economic Review, 60(3), pp.303-328.
Hanson, G.H., 2012. The rise of middle kingdoms: Emerging economies in global
trade. Journal of Economic Perspectives, 26(2), pp.41-64.
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 11 Apr. 2018].
Pelling, H., 2016. A history of British trade unionism. Springer.