Analysis of comparative advantage theory
Comparative Advantage Theory Comparative advantage theory is an application of neoclassical economics to the field of international trade. It argues that the optimal economic strategy for a nation is to exploit its comparative advantages as efficiently as possible. ... Extended to the global economy, neoclassical theory implies that free mobility of products and factors of production across national boundaries will maximize efficiency. ... Productive efficiency is also achieved by the exploitation of comparative advantages as firms are forced by competition in the market to use the most efficient production techniques available. ... Comparative advantage is conferred by a nations natural endowment of factors of production. ... The classical articulation of the theory of comparative advantage was written by David Ricardo in 1817. Ricardo used the concept of comparative advantage to explain why Portugal exported wine, while England exported cloth. ... 82) Question 1: Does the theory (or conceptual model) have explanatory power? You should discuss/identify the logic and structure of the theory, and the type of explanation it offers. Ricardo’s theory of comparative advantage does possess the explanatory power as it does obtain empirical content. Ricardo used the concept of comparative advantage to explain why Portugal exported wine, while England exported cloth. ... The explanans that explain such event is “comparative advantage.” C1: Portugal has comparative advantage in producing wine. C2: England has comparative advantage in producing cloth. L1: A nation must exploit its comparative advantages to maximize economic efficiency and the most effective is through the free trade and open competition across national boundaries. ... The comparative advantage theory meets all requirements of Hempel’s D-N model. The type of explanation provided is causal explanation—“Comparative advantage causes the facts of trade.” Anyhow, there are a number of shortcomings of the theory under the principle of deduction. Theory analysis in term of its explanatory power will be further discussed in my answer to the next question. Question 2: Critique the theory in terms of its explanatory power, i. ... A theory like comparative advantage runs the risk of becoming “true by definition”, opening to the objection to ‘closed’ theory made by Popper. ... The meaning of ‘comparative advantage’ is rather vague as it can be any and all facts which therefore giving no concrete explanation. In Ricardo’s study, the concept of comparative advantage in producing wine has been made objective by referring it to physical facts namely the soil and the climate of Portugal. ... However, let us agree to the premise that one can explain which nations export which products by calling the reason ‘comparative advantage’ (i. ... Explanatory Power of the Theory under Hempelian Models of Expalnation Hempelian Models of Explanation. Explananda Laws Particular facts General Regularities Universal Law D-N D-N Statistical Law I-S D-S When one says “Comparative advantage causes the facts of trade” under universal laws, the term contains two senses. [1] The existence of comparative advantage is a sufficient condition for the existence of the facts of trade (General regularities explaining the general facts of trade: “Why countries trade”).