I have chosen the Comparative Advantage Theory for my key term to discuss. I chose this term because it has a great importance on world trade clearly help shape the pattern of world trade, and also to get a better understanding of the concept. Comparative Advantage is the benefit or advantage of an economy to be able to produce a commodity at a lesser opportunity cost. According to Stalemate (2009), opportunity cost is the value of what had to be given up, or forgone, to consume or achieve the object.
This term simply meaner, countries should specialize in a certain lass of products for export, but import the rest of product even if the country holds an absolute advantage in all products. The scholarly article I chose this week to discuss is, “State should target sectors where the country industry has a comparative advantage” written by T. T Ram Moan. The article talks about Justine Hussy Line’s book titled “The Quest for Prosperity’. The book attempts to give solutions to the world financial crisis.
In the article he talks about Line’s distinguishes between advanced nations and developing ones in the short-run, and how money stimulus ill be effective for developing nations and not advanced nations, and also discuses Line’s perspectives for Long-term growth. According to the article, government must identify the right growth sectors and support investment in those sectors, because it will lead to the overall growth in that economy. A key example is what Singapore did in the sass’s when they focused on specialty chemicals that resulted in drawing developed nations into their economy (Moan, 2012).
This seems pretty easy but has failed in many nations because it is hard to sometimes identify the sectors that truly eve Comparative Advantage in an economy. The theory encourages nations to engage in true free trade and to specialize in areas where they can be very effective and efficient at lower cost, instead of looking to bolster weak industries from foreign competition by imposing protective tariffs that otherwise stifle the production that leads to overall gains in wealth.
Even though this theory has a huge advantage on global trade, it does have its flaws, which includes the following: It may overstate the benefits of specialization by ignoring certain costs. These costs include transport costs and any external costs associated with trade, such as air and sea pollution. Also it does not take into account relative prices and exchange rates, and also assumes perfect mobility of factors without any diminishing returns. Furthermore, complete specialization might create structural unemployment as some workers cannot transfer from one sector to another.