Comparative advantage is the single most widely used indicator for
measuring a country’s international trade performance. A country is considered
to have a comparative advantage in the production of certain goods if it has
low relative cost in the production of that good compared to other countries.
This paper revealed comparative advantage (RCA) for seven major economies that
contributed about 80% of global manufacturing exports. According to business
literature, a country’s standard of living and a firm’s profit depend on
competitive advantage. On the other hand, economics literature suggests that
while it may be desirable to have an absolute advantage in the production of goods, it is the comparative advantage that is vital in explaining
trade patterns.
There are two theories to explain patterns of trade: comparative
advantage and increasing returns to scale. Comparative advantage occurs due to
differences across countries in factor endowment or technology, whereas returns
to scale is related to a country’s size (returns to scale), market structure
(with imperfect competition), and location (with trade costs). While estimation
of comparative advantage at a single point in time is important, a deeper
understanding of trade dynamics requires the knowledge of how these advantages
are changing over time.
Suggested by: Nur Fathin Mohd Khalil (Statistician, DOSM)
No comments:
Post a Comment