International trade

            The article “Government, Trade, and Comparative Advantage’ by Richard Clardia and Ronald Findlay (1992) focuses on how governments can go about utilizing comparative advantage to do well in international trade. According to the authors, countries are a collection of households that have access to technology which can be utilized, depending on a country’s preference, to produce goods that are later traded on international markets. The government is therefore responsible for ensuring that a country’s infrastructure and state of the economy is ideal for business not only in a local, but also a global scale. The government is thus expected to maintain order and ensure that laws and regulations are followed; creating an ideal infrastructure; enforcing contracts; and creating a good business environment that attract international business partners. According to the authors, a country is best suited to benefit from international trade if it has a comparative advantage and this can be greatly improved if it finds a balance between its comparative and absolute cost.

            Comparative advantage refers to a situation where a country has a good economy that allows it to produce goods and offer services at a much lower cost compared to its competitors. The economy not only allows for lower pricing but also enables the country to enjoy stronger sales margins from the goods and services sold (Seth, 2018). Absolute cost advantage on the other hand refers to a country’s ability to produce more goods and offer more services than its competitors but do so using the same resources used by the competition (Aahana, 2018). When operating on a global scale, a country should deal in products and services that present an absolute cost advantage as this is the best way to achieve a comparative advantage over other countries in the international market.

            In their study, Clardia and Findlay (1992) argue that a country can best benefit from the comparative advantage approach if it specializes in goods and services that it can easily manufacture and produce at lower costs and those that are in high demand from other countries in the international market.   As part of their analysis, the authors utilize the use of the model of endogenous comparative advantage, optimal government policy and international trade to show how a country can use comparative advantage to benefit from wheat production especially in a country with advanced technology (Clardia & Findlay, 1992). If a country has the tools to harvest and produce wheat, exporting the commodity is likely to offer a comparative advantage to other countries in the global market.

            The research conducted by Clardia and Findlay (1992) focused on determining how a country can position itself to benefit from comparative advantage. The research analyzed how a country that deals in the production of wheat and has advanced forms of technology can determine which commodity will be most profitable in the international market. The authors suggest that a country first starts by identifying which of the two commodities will incur the lowest cost to produce and which are in high demand (Clardia & Findlay, 1992). If, for example, other countries in the international market are in need of wheat, then the country that has both wheat and technology is likely to benefit more from exporting wheat. Since it has the raw materials and the technology needed to produce wheat, the comparative advantage is likely to be achieved from the export of wheat.

            The study draws the conclusion that a country that desires a commodity from another country is more likely to import it from there rather than producing it on its own. Even if the exportation of wheat is likely to give one country a comparative advantage, other countries are likely to import the wheat from the said country because importing is cheaper that producing it on their own. The country that exports the wheat must therefore utilize its ability to produce wheat at a lower cost as well as its technology to ensure that its economy, infrastructure and other factors that ensure the steady supply of wheat to other countries. The country must therefore focus on the exportation of wheat as it is likely to benefit from the sale in international market. In relation to absolute cost advantage, the authors argue that the country exporting wheat is likely to do so at a lower cost and produce more wheat for sale in the international market because it has the technology, infrastructure and economy suitable for exporting the wheat.

            In conclusion, Clardia & Findlay (1992) suggested that governments should invest in a country’s economy and infrastructure to ensure that it is in a position to benefit from international trade. The country must first identify products that it can produce with ease and at the lowest cost so as to have an absolute cost advantage. If well produced, the products can be sold in the international market at a comparative cost. Since the products are produced cheaply, they can be manufactured in more quantity and sold at relatively lower prices than those set by the competitors. This will ensure that the country maintains a competitive advantage and still retails its comparative advantage.

 

 

 

References

Aahana S, (2018) “Adam Smith’s theory of absolute cost advantage” retrieved from,             http://www.economicsdiscussion.net/theory-of-absolute-cost/adam-smiths-theory-of-        absolute-cost-advantage-economics/30675

Clarida H and Findlay R, “Government, trade and comperative advantage” The American             Economic Review”

Seth T, (2018) “Theory of comparative costs” retrieved from,             http://www.economicsdiscussion.net/theories/theory-of-comparative-costs-with-six-            criticism/1916