Sunday, October 30, 2011

Comparative Advantage

The principle behind comparative advantage seems fairly simple: all parties will have a lower opportunity cost for something, giving them the advantage to produce that good or service. It seems like this is the perfect formula for global prosperity. Wouldn't we just have to create a think tank of brilliant people from around the world to determine the comparative advantage for each country and start producing on that model? It would create the ideal scenario for both developing and developed countries. Free trade would be the rule of the day and pigs will grow wings and fly. Even though it sounds pretty amazing, we are still a ways away from free trade. So what are some the factors that are preventing this from happening?

1) Domestic Politics. Politicians protect domestic industries to get re-elected. Even if a small country in Africa that no one can pronounce has a comparative advantage in making shoes, the shoe factories in the U.S. don't want to go out of business. It's a hard sell to convince someone to give up their job for "the better good of the world". So politicians promote protectionism through trade policies and the African country never gets the chance to sell its shoes in the U.S..

2) International Politics. Who would regulate the international economy to make sure that the playing field was even? We would need a referee, but how are we going to agree on what or who that would be?

3) Evil Dictators. Ok, evil dictators might be a strong description, but sanctions are still used as a political tool. So I guess evil dictators would fall under reason 1 and 2, but the point is more about the unpredictability of other nations. Political systems determine national trade policies, so the unstable nature of some countries would be constantly changing the dynamic of international relationships and national priorities. Although the market would adapt to these changes in the long run, the frequency and severity of such changes might make it difficult to ever stabilize.

Comparative advantage is beautiful when it is practiced, so hopefully someday we can work out a system that will allow this on the international level.

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