Comparative Advantage Gains from Trade

It is important to not confuse the terms "comparative" and "competitive" as they apply to the goals and ideals of world trade. Kennedy and Koelim (1996) find that "despite this wide acceptance in the professional community, the basics of international trade are still poorly understood by many policy makers and casual commentators" (1). The "comparative advantage" theory has been a part of international economic studies since it was created by David Ricardo, an economist who lived in the 17th century.

Ricardo's theory was that each nation has good points and bad points in its economy. In the classic example of two countries, Ricardo sets up a model where Germany and France only have two products -- beer and cheese. Kennedy and Koelim (1996) argue that "the resources in each country are finite, implying that each can produce only a limited amount of goods. Increasing production of one good means reducing production of the other. Each country can produce either good, but Germany is more efficient brewing beer than France and France is more efficient at making cheese than Germany" (1).

A. Isolationism or autarky, wherein they both try to maintain their own production quotas which would result in expensive domestic beer in France and expensive domestic cheese in Germany.

B. Competitive intercountry trade, wherein Germany would try to force both its beer and cheese on France, a

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d Hewlett Packard can both produce both software and hardware. Both of those companies have an absolute advantage in the U.S. industry. Can they benefit from "comparative trade?" Consider this assumption. Hewlett-Packard can earn $20,000 an hour selling its hardware and Microsoft can make $500,000 an hour selling its software. If it decided to develop hardware, probably half of that $500,000 an hour would end up in R&D, therefore, they would lose. HP on the other hand, would not have to gear up to manufacture hardware, but if it wanted a dynamic software program, it would have to develop one. By working together, both companies benefit. But does that hold true when the theory is applied to two countries? Situation 1: Japanese Software Development Would Japanese hardware companies benefit from working with the US software industry? That is a big philosophical question. Since Japanese industry does not grow randomly, the Japanese government and industry leaders would first have to decide if the present structure of the economy would likely replicate the evolution of the Japanese semiconductor industry. Since in 1996, foreign firms and especially US firms had about 75% of the Japanese packaged software market, there is a
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Approximate Word count = 1459
Approximate Pages = 6 (250 words per page)

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