The Importance of Comparative Advantage In International Trade
The role of comparative advantage has great importance in guiding international trade and commerce. The closed economies which create artificial barriers to trade and commerce hardly benefit by pursuing such restrictive policies. It is a proven fact that by regulating trade and commerce it is not possible to increase the quantity of industry in any society beyond what its capital can maintain. It can at best direct a part of it into channels into which they might not have otherwise gone. But the efficiency of the deployment of scarce resources can not be guaranteed in this artificial manner.
In an economy which purely driven by ideological considerations such distortions are not common and political objectives override economic pragmatism. The economic gains are sacrificed for some other political objectives. In its zeal to develop a self-reliant economy, it diverts vital, productive resources into industries in which it neither possess the right technology nor the efficient labour to ensure an efficient deployment. It could have easily outsourced the goods produced by such industries from other countries which hold comparative advantages.
Adam Smith's observations are worth quoting in this context:”What is prudence in the conduct of private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own indutry employed in a way in which we have some advantages. The general industry of the country, being always in proportion to the capital which employs it ,will not thereby be diminished.”
A comparative advantage is the advantage which exists in terms of price differential and variance in volume of production. For example if India and Srilanka both produce automobiles and shirts and it produces automobiles three times more efficiently than Srilanka and can produce shirts twice as efficiently as Srilanka, India holds absolute advantage in both these categories but the advantage it has in relation to automobiles is relative. And it would make greater sense to export automobiles to Srilanka and import shirts from that country. This arrangement works to the advantage of both the countries. Thus a country that lacks an absolute advantage and a developing one, can participate in international trade to its benefit.
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