Challenging Comparative Advantage

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Comparative advantage is a principle developed by David Ricardo in the early 19th century to explain the benefits of mutual trade (Carbaugh, 2008). Many underlying assumptions of comparative advantage depend on states of economic equilibrium and an absence of economy of scale. In reality, economies are dynamic and subject to innovation and interference; which has led to revised assumptions of return and competition (Krugman, 1987). These factors have created questions of free trade and governmental participation in an economy by the development of strategic trade policies. These new concepts do not replace the theory of comparative advantage; however, they further explain how trade can benefit a country's economy (Krugman, 1987).

Comparative Advantage Theory

The principle of comparative advantage holds that trade can exist internationally even when one country holds a distinct advantage over another country in the production of a good. Ricardo made several assumptions for his theory to hold true including: the existence of a two nation model with labor as the only input, fluid labor transfer across industries, fixed technology with zero transportation costs, the absence of governmental barriers allowing for balanced free trade and ignorance of price and production models (Carbaugh, 2008). Under the Heckscher-Ohlin theory, the basis for trade is resource abundance, however trade equilibrium is assumed via equal technology and demand between nations (Nobel Media, 2006). Both theories require constant returns and assume the existence of perfect competition (Schweinberger, May, 1996).

Constant return means input and output costs remain the same over time regardless of production levels (AmosWEB LLC, 2000-2012). The...

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...e for Economic Policy Research: http://www.cepr.org/pubs/Bulletin/meets/215.htm

Dickson, P. R. (1996). The Static and Dynamic Mechanics of Competition: A Comment on Hunt and Morgan's Comparative Advantage Theory. Journal of Marketing; Volume 60 , 102-106.

Hunt, S. D., & Morgan, R. M. (1995). The Comparative Advantage Theory of Competition. The Journal of Marketing; Vol. 59, 1-15.

Krugman, P. (1987). Is Free Trade Passe'. The Journal of Economic Perspectives; Vo 1, #2l, 131-144.

Krugman, P., & Obstfeld, M. (2003). Economies of Scale, Imperfect Competition, and International Trade. In I. Petsas, International Economics: Theory and Policy, Sixth Edition (pp. 6-2 through 6-61). Upper Saddle River, NJ: Pearson Education, Inc. .

Nobel Media. (2006, February 28). Why Trade. Retrieved from nobelprize.org: http://www.nobelprize.org/educational/economics/trade/ohlin.html

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