The economy of the world as a whole as well as the economies of the countries across the globe have experienced considerable dynamics and modifications over decades, much of which can be attributed to the international events like Globalization and trade liberalizations across the globe, which in turn have contributed in making the global economic and commercial environment more integrated and inclusive, with the countries becoming more interconnected with one another in the contemporary period.
This has resulted in developing the global trade activities significantly over the years. The term “trade” implying the action of exchanging different goods and services between two or more individuals, regions or countries per se, has gained significant importance and multi-diversity in its notion and perception across the countries over the years. With Globalization, Liberalizations, increase in product diversities as well as technological and infrastructural innovations, trade activities have been increasing considerably across the globe and the modes, nature and magnitude of trade have also been changing from simple to multi-dimensional forms.
In this context, there have been significant research and developments of trade theories over the years and with time more inclusive and relevant theories have developed from the limitations of the simpler ones, of which the most popular and globally accepted one has been that of the theory of Comparative Advantage proposed by David Ricardo (Yürekli). The concerned essay, keeping the assertions of this trade theory into consideration, tries to analyse the real-world relevance of the same, in the context of the trade dynamics of one of the major influential and commercially active economies in the globe, the economy of United Kingdom.
Trade Theory of Comparative Advantage
The theory of Comparative Advantage, in the domain of international trade, came into existence following the limitations of its predecessor, The Absolute Advantage Trade Theory, proposed by Adam Smith. The Absolute Advantage Theory asserted that the countries should produce and trade those commodities or services in which the they have absolute advantage over other countries, that is, in which using the same amount of productive resources they could produce greater quantity than the other countries (Bowen, Hollander and Viaene 2012).
However, the theory did not take into account the real-world instances in which often one country enjoys productive efficiencies in all the products over its partner countries, thereby nullifying trade possibilities among the countries in concern. Taking this into account, Ricardo’s Comparative Advantage theory emphasized on the concept of “Opportunity Cost” of production, which is the cost of production of one extra unit of a commodity, measured in terms of the amounts of other commodities which have to be sacrificed for the same (Cuñat and Melitz 2012). Keeping the notion of opportunity cost of production in consideration, the comparative advantage theory suggests that the countries should concentrate in the production and export of those commodities and services in which they have low opportunity cost of production as compared to their trading partners and should import those in which the opportunity cost of production is high. As per the assertions of the theory, by doing so, the productivity of each country is expected to increase, which in turn is expected to increase the global productivity (Wagner 2012).
Example: If in a two country two commodity scenario, Country A can produce one extra unit of Commodity 1 by sacrificing less of Commodity 2, compared to that of the loss which is experienced by Country B in producing one additional unit of Commodity 1, then Country A is said to have lesser opportunity cost and a comparative advantage in the production of Commodity 1 over that of the Country B. On the other hand, if the opportunity cost of production of Commodity 2, in terms of loss of Commodity 1 for one additional unit of production of Commodity 2, over that of Country A, then Country B is said to have a comparative advantage over Country A in the production of Commodity 2. In such a scenario, it is beneficial for Country A to produce Commodity 1 only and for Country B to produce Commodity 2 only and then exchange with one another. This in turn helps in increasing the total production of both Commodity 1 and Commodity 2, using the same amount of productive resources present in total.
The above discussed theoretical assertions and its real-world relevance can be analysed by tallying the same in the light of the trade dynamics in the United Kingdom over the years.
Comparative Advantage: Case study of United Kingdom
As discussed above, being one of the most industrially developed and economically progressive economies in the global scenario over centuries, the economy of United Kingdom has experienced huge dynamics and shift patterns over the years and enjoys a hugely developed and multi-dimensional trade sector in the current times. The country has developed long term and varied commercial connections with all the major economies over years and have reaped the benefits of such trade connections and their own comparative advantages in production and international supply of certain commodities and services over the years. The contribution of the trade activities in the economic growth of the country can be seen as follows:
Figure 1: Share of trade activities in the Gross Domestic Product of the country (2001-2016)
(Source: Ec.europa.eu 2018)
The considerably and consistently high percentage of the contribution of the commercial and international trade activities of UK in its GDP, in turn indicates towards the importance of the sector in the growth of the country and its economy over the years. The country has been experiencing huge increase in its imports compared to that of the exports of the same, over the years, which can be attributed to the reduction in the free trade barriers in the country over the years, in the form of reduction of import tariff as can be seen from the following figure:
Figure 2: Reduction in the rate of import tariff in UK over the years
(Source: Wits.worldbank.org 2018)
This in turn has led to the increase in the imports in the country with time. The trade pattern of the country is also seen to be experiencing a visible shift in the aspects of the types of commodities which are exported by the concerned country (Bown and Crowley 2013). The country has been experiencing a shift in the export products from primarily low-end manufacturing and basic commodities to that of high end technological commodities and professional services as can be seen from the following figure:
Figure 3: Value of exports of the top export commodities of the country over the years
(Source: Comtrade.un.org 2018)
As is evident from the above figure, the export of the commodities of the country, which used to experience huge outflow to other countries, including gold, animal blood for therapeutic use, alcohol and others, have been decreasing in the current period (Costinot and Donaldson 2012). However, the automobile sector of the country has been experiencing considerable increase in the amount of exports in the last few years as is evident from the above figure.
The contemporary structure of the export market of the country mainly consists of different professional services and high technological products, the share of each being seen from the following figure:
Figure 4: The contribution of different service sector in export dynamics of UK
(Source: Comtrade.un.org 2018)
As is evident from the above figure, the country has been experiencing huge increase in the services like that of travel, transport services, commercial and financial services as well as in the domain of provision of insurance services, in the contemporary period. Thus, it can be asserted that with time the export of manufacturing and subsistence commodities from UK has been decreasing and the country is relying more on other countries for the imports of such commodities. On the other hand, the share of the service sector components has been increasing in the export basket of the country (Laursen 2015).
The increasing share of imports, especially of the manufactured and agricultural commodities, along with a shift in the components of export basket has led to dynamics in its trade balance, with an increase in the balance of trade in the service sector (with greater export and less import) and a decrease in the trade balance in the commodity sector (with greater import and low export), which can be seen from the following figure:
Figure 5: Service sector balance, commodity sector balance and total trade balance of UK
(Source: Ons.gov.uk 2018)
From the above discussion, it can be seen that the United Kingdom has been experiencing a c considerable shift in its export dynamics, with the pattern of export shifting from the manufactured commodities to different professional, financial and technological services. This can be attributed to the shift in the development of the productive resources which in turn is shifting the comparative advantage of the country (Levchenko and Zhang 2016). With time the country has been developing into a capital-intensive country from low skilled labour intensive one, which in turn led to the decrease in the opportunity cost of production of the capital-intensive products and services and an increase in the opportunity cost of production of the labour-intensive ones. This in turn explains the increase in the export of services and import of basic and manufacturing commodities, which in turn shows the comparative advantage enjoyed by the contemporary UK economy in the service sector production and supply.
From the above discussion it can be asserted that the Theory of Comparative Advantage, being one of the most popularly and widely used theories in the domain of international trade, still has considerable relevance in the contemporary global trade and commercial dynamics as can be seen from the implications of the same in the decision making aspects of the producers of the different countries regarding what to produce and export and what to import in exchange to maximize economic benefit of the countries and the world as a whole. This can be seen to be applicable from the trade scenario of United Kingdom, which, over the years is seen to experience a shift in its export basket, from manufacturing and subsistence commodities to different service related activities, which can be explained by the shift in the comparative advantage of the country in the recent period.
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