Introduction - International Trade
This Economics essay is about international trade, and discusses the likely factors that determine the comparative advantage in trade for the USA.
Comparative Advantage
What is "comparative advantage"? Comparative advantage is the idea that a country should trade in a good in which it has the lowest opportunity costs in producing that good. Even if a country has absolute advantage in the production of all goods than another country, the idea of comparative advantage is that the opportunity costs matter and that hence both countries can still trade, and gain from trade.
This Economics essay is about international trade, and discusses the likely factors that determine the comparative advantage in trade for the USA.
Comparative Advantage
What is "comparative advantage"? Comparative advantage is the idea that a country should trade in a good in which it has the lowest opportunity costs in producing that good. Even if a country has absolute advantage in the production of all goods than another country, the idea of comparative advantage is that the opportunity costs matter and that hence both countries can still trade, and gain from trade.
Generally, trade models built upon the theory of comparative advantage have the following assumptions: Perfect mobility of the FOP (factors of production), which means that resources used in one industry can be substituted for another perfectly; constant returns to scale, which means that doubling the inputs in each country leads to a doubling of total output; there are no externalities arising from production and/or consumption (and by extension there are no other associated market failures); and transportation and other transaction costs are negligible.
Factors Affecting Comparative Advantage
What determines comparative advantage, and in this particular context the comparative advantage of the USA?
Dynamic Concept - Dynamic Comparative Advantage
First, it should be noted that comparative advantage is a dynamic concept, which means that it can and does change over time. Some companies enjoy a comparative advantage in a product they have produced for several years, only to find that eventually they face increasing competition as rival producers from other countries enter the market. For instance, Ford used to be able to sell their cars competitively overseas, but with the rise of Korean cars and Japanese cars - predominantly Japanese cars - now, many people worldwide perceive Japanese and Korean cars as good as, if not better, than American cars.
Factors of Production - Quality and Quantity
Also, the quantity and quality of the factors of production available would definitely affect the comparative advantage of the USA (in particular, the natural resources that a country possesses, the size and efficiency of the available labour force, the productivity of the existing stock of capital inputs, and the skill and organisational talent of its entrepreneurs and risk-taking businessmen). Focusing narrowly instead on labour and capital, to focus this Economics paper, any economy can improve the quality of its labour force and increase the stock of capital available to therefore expand the productive potential in industries in which it has a comparative advantage. In the case of the USA, this means that the US government can focus on improving the productivity of its labour force and raising employment, as well as focusing on their current capital-intensive approach to production.
Industrial Policy and R&D?
In Singapore, in contradistinction to the USA, there has been industrial policy that aims to direct comparative advantage, since after all comparative advantage is indeed a dynamic concept. Investment in research and development can lead to dominance in certain industries, and industrial policy helps to keep this keen and targeted (R&D is very important in industries where patents give some firms significant market advantage, and hence market dominance). In the case of the USA, military firms (once termed the military-industrial complex) can be seen as an area in which R&D served to keep the comparative advantage of the USA in military weaponry and high technological areas.
Yet Other Factors - Inflation, Protectionism, and Non-price Competitiveness
There are also other factors affecting the comparative advantage of countries, which may be important or relevant in the case of the USA. These other factors are inflation rates, protectionist measures, and nonprice competitiveness of producers in terms of product design and other such preference-related measures.
First, long-term rates of inflation compared to other countries would worsen competitiveness and hence cause a decline in the comparative advantage of that particular good. This would affect all producers not just the USA per se.
Secondly, in terms of protectionism, import controls such as tariffs and quotas can be used to create an artificial comparative advantage for domestic producers. In the case of the USA, protectionist measures are sometimes used (as Ha Joon Chang once mockingly said, this was akin to "kicking away the ladder").
Lastly, the nonprice competitiveness of producers, such as the product design, reliability, and the quality of after-sales support also affects comparative advantage. In this area, the USA has a lot of fans and some of its products are quite popular worldwide, for instance the infamous or for that matter famous iPhone and other Apple products.
JC Economics Essays: Economics Tutor's comments - This Economics essay on international trade in the context of the USA is short, sharp, and to the point - and it does make an attempt at addressing the requirements of the Economics question. There are many good elements in this writing and analysis that are worthy of learning and study. However, the usual tutor's questions are: how can this paper be made better? For instance, think about the conclusion - this Economics paper does not have a conclusion that brings in the relevant real world context of the USA. How would you craft an evaluative, nuanced, and clear conclusion for this Economics paper? Also, what other economic ideas or real-world arguments can you think of? Finally, think about the alternative approaches and methods in which you could approach this Economics question. Think through the process of writing, especially for examinations, tests, and term projects. Thanks for reading and cheers!
