Critically analyze laws of comparative advantage Essay

Critically analyze laws of comparative advantage - Essay Example The theory of comparative advantage formulated by English economist David Ricardo in the early nineteenth century1. Ricardo encouraged each country to specialize in producing commodities for which it is best suited and then trade with other countries to obtain a wide variety of goods. The increased efficiency of production within each country makes greater worldwide consumption possible. This theory suggests that all nations have an interest in opposing restraints on trade. If less developed countries (LDCs) remain isolated and closed to foreign trade and investment, they lose opportunities to benefit from the technology, capital, and consumer goods offered by industrialized nations (Barry Clark, 1998). The theory of comparative advantage, of course, argues that unrestricted exchange between countries will increase the total amount of world output if each country tends to specialize in those goods that it can produce at a relatively lower cost compared to potential trading partners. Each country then will trade some of those lower-cost goods with other nations for goods that can be produced elsewhere more cheaply than at home. At the end of the day, with free trade among nations, all countries will find that their consumption possibilities lie outside their domestic production possibilities. The basic theory assumes that all the factors of production are... Further, it is assumed that perfect competition, and not monopoly production prevails and that all resources in each country are fully employed. The last is an especially important assumption, particularly for less-developed nations, since with less-than-fully employed resources, tariffs or other forms of protection (including subsidies) to block imports and to increase domestic employment could well be the preferred policy. With less-than-fully employed resources, the key allocative issue becomes an internal mobilization of domestic resources to their full use, rather than a reallocation among alternative uses. To be reasonably confident in applying the basic Ricardian analysis and its conclusions to any country or situation, it seems sensible, in practice, to inquire to what degree the assumptions of the theory conform to the reality of the economy under investigation. (James M. Cypher, James L. Dietz, 1998) While these are important considerations having to do with the validity of assumptions in practice, there are other concerns about a blanket endorsement of the comparative advantage argument and free trade recommendations for less-developed nations. Joan Robinson's comment on the real-time effect of following free trade and specialization, at least as far as Portugal was concerned in Ricardo's original example, remains provocative and presages our reformulation. (James M. Cypher, James L. Dietz, 1998) . . The imposition of free trade on Portugal killed off a promising textile industry and left her with a slow-growing export market for wine, while for England, exports of cotton cloth led to accumulation, mechanization and the whole