Comment critically on comparative advantage as a basis for international trade

Comparative advantage was an idea proposed by David Ricardo in 1817, and is an idea which can be used on a variety of scales, but is most often used when analysing international trade. Ricardo used the idea of wool produced in England at a lower opportunity cost than wool is produced in Portugal relative to wine, while in Portugal wine is produced at a lower opportunity cost than wine is produced in Britain relative to the wool. This means that in Portugal it is less costly to produce wine in terms of what is the next best use of the resources involved.

The reasons that this occurs could be for any number of reasons: weather, technology, productivity of workers in that industry and so on. This idea is one that all countries can benefit from, as even a tiny country will have a comparative advantage in a good relative to another good, even when trading with a world superpower. Comparative advantage is often used to look at just two countries and two goods, which is not necessarily a pitfall as the model can be applied to multiple countries and multiple goods, it is just for simplicity. Shown below is a very simple idea of the benefits produced by comparative advantage:

As with any model in economics, comparative advantage is not ideal. It is a proposed model based upon a fundamental idea which has very often proved itself to be true, but it still relies on many ideals and factors that do not and cannot realistically exist. These underlying assumptions mean it is difficult to base international trade upon the comparative advantage theory. However, the comparative advantage theory is questionably a solid 'basis' to trade, even if it cannot explain international demand and supply in its entirety.

The biggest problem when it comes to how affective comparative advantage is in dictating trade is that all factors of production are assumed to be perfectly mobile, something which it is fair to say is never the case. The idea is that any factors of production, be it labour, capital, land or entrepreneurship, that these, if made redundant from one industry it is thought that these resources could immediately be transferred to another industry that has a comparative advantage over the other country. This is clearly not going to be case, unless the industries are very similar, something which contradicts another theory of comparative advantage, which states all goods are homogenous. It is therefore almost an impossibility for this to occur, for the unemployment created by a failed industry to be suddenly removed by another.

Structural unemployment of people without the necessary skills to work, is inevitable. Even in the EU, where the S.E.A single market was set up in 1986, it is still difficult just to go and work in another EU country for geographic, structural and lingual reasons. The government would have to spend a huge amount on supply side policies such as very efficient schemes of education or perhaps low taxation (Thatcherite) to be able to transfer skills that quickly, and shift the long run aggregate supply curve to the right, thus reducing unemployment:

Because the government realises just how unlikely and difficult it is to transfer resources, it actively discourages the failure of an industry, as shown by the EU's enormous subsidies of the farmers in this country, most notably the Common Agricultural Policy. It is therefore acting against the theory of comparative advantage, as this would dictate that the farmers move into the service sector, where Britain is very productive. This shows how politics has a great affect on trade once the industry has been established, though comparative advantage may well have dictated what industries were originally started and how they grew, even if politics has a greater effect today.