Comparative Advantage
The theory of comparative advantage was first put forward by David Ricardo in 1815. This theory supplanted Adam Smith's absolute advantage theory , presented in The Wealth of Nations, which suggested that if a country can provide a commodity at a cheaper price then it should be bought instead of producing it locally. Ricardo's theory suggested that international trade was not governed by absolute advantage in price but by comparative advantage. Following this principle, a country can still gain from trading certain goods even though its trading partners can produce those goods more cheaply. The comparative advantage comes if each trading partner has a product that will bring a better price in another country than it will at home. If each country specializes in producing the goods in which it has a comparative advantage, more goods are produced, and the wealth of both the buying and the selling nations increases.
Ricardo's theory has been well accepted by economists for almost two centuries and has been the basis for most international trade that has taken place. This theory, however, is starting to face criticism and its applicability to the new economy. Modern economists have started to question its validity to the newer forms of economic trades that are starting to take place. Foremost amongst them is outsourcing, a topic that has been a cause célèbre in United States for the past few years. Though outsourcing is not a new economic concept, it has gained much popularity due to the rampant movement of jobs from United States to countries with cheap labor, primarily in the technology sector. This movement of jobs to countries like India and China has left thousands jobless in this country and has been ensued by public outcry.
Adhering to the classical school of comparative advantage, most economists have tried to justify the movement of these jobs by this doctrine. They believe that this movement is explained by the doctrine and that anything that...
View Full Essay