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How comparative advantage applies in a world of fragmented production and intra-industry trade

Essay 2012 7 Pages

Business economics - Trade and Distribution

Excerpt

1. Introduction.

The concept of comparative advantages is a key idea of international trade theories such as the Ricardian Model and the Heckscher-Ohlin Model. The Ricardian Model was developed by the British economist David Ricardo in the 19th century whereas the Heckscher-Ohlin (H-O) Model was proposed by two Swedish economists in the 1970s. However, new international trade patterns, such as intra-industry trade and world fragmented production, have now emerged. Therefore, it is worth investigating whether the concept of comparative advantages is still a useful tool to understand and describe current international trade. This essay will first analyze the two models based on comparative advantages giving two real examples. Second, fragmented production and intra-industry trade will be considered. Using real cases, it will be demonstrated that comparative advantages apply to both these two types of trade, although mainly in the case of fragmented production.

2. The Ricardian and H-O models

2.1 Definition

The concept of comparative advantage means that a state can produce different goods, however it will specialize on the production of the good in which it has the lowest opportunity cost compared to other countries (Krugman and Obstfeld, 2003, 12). For example, in the Ricardian model, if a state can produce, using the same amount of labour, more good X than good Y, it has a relative advantage in the production of the first product. When the state opens to trade with another state, each country will specialize in the production of the good in which has a relative comparative advantage. In the H-O model the comparative advantages of countries are also affected by the relative endowment of factors and the relative intensity of those factors in the production of goods. Therefore, a country will produce a good that is relatively intensive in the production of a factor relatively abundant in that state (Krugman and Obstfeld, 2003, 75). For example, consider a state that can produce two goods, clothes and food, the first is relatively intensive in land while the second is in labour. If that state has relatively more land than labour, it will produce food.

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Details

Pages
7
Year
2012
ISBN (eBook)
9783656401759
File size
419 KB
Language
English
Catalog Number
v211459
Institution / College
London School of Economics
Grade
Tags
trade comparative advantages political economy

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Title: How comparative advantage applies in a world of fragmented production and intra-industry trade