Question

Using the information below, discuss the following: "Unrestricted free trade between nations will raise the economic welfare of countries that participate in a free trade system". Do you agree with this statement? Explain using the concept of comparative advantage.

Do you also trade with others? How do you apply comparative advantage to your own life? Give an example for how each of us is better off because we each specialize in certain tasks and trade with others.

Below is an example from my life:

I can teach 5 economics classes if I do this full time. I also would like to fix my car myself so I have to give up teaching 0.5 class hours just for oil change. If I want to change the tires I will need to give up 1.5 class hours. Now suppose that I decide to fix the engine in my car. That will definitely require more skills and I will have to get some training for that. That means I will have to give up teaching more classes (let’s say 3 classes). My opportunity cost will increase as I try to do more complex jobs for my car.

If I’m specialized in teaching economics, I have a comparative advantage in this task. That means, I can teach economics at a lower opportunity cost than other people. If I try to fix my car, my opportunity cost will be high as I will be giving up teaching so many classes to be able to do that. That’s why I never try to fix my car! I take it to a mechanic because the mechanic can do this job at a lower opportunity cost compared to my opportunity cost.

In other words, both I and the mechanic specialize in certain jobs and when we trade we are both better off!

For more on comparative advantage and trade, please see the following:

Comparative Advantage

If you do everything better than anyone else, should you be self-sufficient and do everything yourself? Self-sufficiency is one possibility, but it turns out you can do better and make others better off in the process. By instead concentrating on the things you do the “most best” and exchanging or trading any excess of those things with someone else for the things that person does the “most best,” you can both be better off. Comparative advantage fleshes out what is meant by “most best.” It is one of the key principles of economics.

Comparative advantage is a powerful tool for understanding how we choose jobs in which to specialize, as well as which goods a whole country produces for export. Can one country produce everything so cheaply that other countries have no production options and no work opportunities for their citizens? Do large countries—which can produce more of everything—take unfair advantage of small countries when they trade?

Answer 1

Comparative advantage talks about producing a good at a lower cost than other countries. As stated in the question relating to teaching economics and fixing mechanical issues of a car, herein the person is ad a advantage in teaching than fixing car problem. This is her/his efficiency and hence a comparative advantage. In real life also the same thing happens. Where some country is full of natural resources like gold or coal fields, they have advantage to produce that more than any other country who doesnt have the resources. Every country has something speciality. Some countries have abandunt unskilled labour, some have abundance of natural resources, some countries have favourable climate for agriculture, whereas some has capacity of fishing and earing by it due to its geographic location. Every country has certain speciality. And it should be the price focus to engage in that activity among all so as to have lower cost of production . As per Ricardo, even if a country has an absolute advantage in producing all goods, it can still benefit the trade. As the country will be at an advantage only when it specializes in its comparative advantage. So in order to get benefited, it will focus on its core strength. Also in real life, it is not possible for a country to produce everything as one country cant be expert in every field. That is why trade came in the play. Every country comes into trade contract with another country because one country can be self reliant but never self sufficient in every field. Thus thought producing goods at cheap is possible by a country but that doesnt eliminate other countries to attain their expertise. All other nations will somewhat equally or unnequally have some advantage to produce goods or provide service at cheaply as compared to other.

It is however possible that large country can produce more of everything due to their development and advancement than rest of the country. At times the country may benefit from it and may affect the poor nation. It can be understood as, the country who is having comparative advantage , may come into trade with poor nation by supply low quality and cheap products thus capturing the market of poor nation. It will result to shut down if domestic industries in the poor nation due to huge competition from the advanced nation. Thus the country which are poor can be exploited indirectly. There always exists a scope of unfair and unjust issues where a country is still emerging and fighting for basic facilities like food, electricity. They can be exploited by advanced nation as they can produce goods at cheap and sell it there. It is just an example among many such examples. Thus poor nations need to adapt to the change and try being self relient and make use of whatever are its strength(say labour).