ESSAY: evaluate the extent to which comparative advantage is the main determinant of world trade patterns

Question 1

Definition of comparative advantages?

Answer 1

when a country can produce a good at a relatively lower opportunity cost

Question 2

Why comparative advantage can determine world trade patterns?

Answer 2

• if comparative advantage theory applies, two countries can specialise in the goods that they have the comparative advantage in, they can then trade and increase world output
• developed countries tend to have a high comparative advantage in tecnologically advanced, capital intensive products whereas developing countries are better at low value labour intensive products
• specialisation as a result of comparative advantage decreases total costs because they allocate all resources to the good in which they specialise and can produce at a lower unit cost than other countries because their workers are better than other countries at producing such goods
• can determine world trade because global output is increased and standards of living will rise

Question 3

Why other factors have an effect on world trade??

Answer 3

• protectionism eg between the USA and China, there may be a comparative advantage to be found between these two super powers, but this isn’t exploited because they are in competition with each other and want to protect domestic industries through tariffs, which raises the prices of imported goods and discourages this trade
• the growth of trade blocs eg the EU has seen more inter-regional trade between its members owing to a lack of tariffs etc
• the growth of developing countries such as India and China who have become two of the biggest world exporters and trade suppliers; China manipulate their exchange rate to keep it comparatively low to encourage exports and discourage imports
• most trade still occurs between developed countries, even if some developing or emerging economies have comparative advantages

Question 4

What it depends on??

Answer 4

• the model of comparative advantage is simplified and there are problems with applying it everywhere eg PPP may not be level across countries so whilst one country may make a good due to its comparative advantage, trading with another country might not be beneficial due to exchange rates
• hard to ensure 1:1 trade
• exchange rates, protectionism and balance of payments motivation may account for many aspects of world trade, as well as the level of development of a country