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Limitations of Comparative Advantage for the World’s Major Economies

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In the case of Analysing International Trade Patterns: Comparative Advantage for the World’s Major Economies, the index of revealed comparative advantage (RCA) given in equation 2, (share of product j in country i’s total exports/ share of product j in world total exports) > 1, it is sensitive to a few factors. For example, the measure relies upon how extensively the items are characterized and on how reference exporters are characterized. The measure of RCAs at diverse levels of aggregation could prompt diverse conclusions. For example, a country may not have a RCA in a more aggregate level product but could have RCA at a more disaggregate level with the same aggregate product, and vice versa. As far as knowing that which area or industry of a country has a comparative advantage, that others country don’t have, then it would be best to use data at the highest level of disaggregation. In the same way, reference exporters could be all the exporters on the planet or a subset of nations and the export market might be the entire world or a particular area, for example, the US or EU markets.

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The case study of Comparative Advantage in International Trade for Central Asia expressed that this statement isn’t useful for our present task because introductory models of international trade tends to neglect crucial features of reality that have a strong bearing on monetary improvement in Central Asia. In the first place, Central Asian nations are generally landlocked and transport expenses to the closest port (still the best accessible guess of a passage to the world market) are genuinely high. One instinctive method for representing universal transport costs in monetary models is to expect that a specific offer of imports and exports “evaporates” before delivery and reaching the respective importing country’s border. If transport costs from other country are too high, international trade becomes unattractive relative to domestic production. Furthermore, if the transport costs are differ from different types of products, they may drive the commodity composition of a country’s international trade and push different determinants into the background.

Second, basic trade models typically normally expect that there is an equivalent number of merchandise and factors of production. However, in reality there are more goods than factors of production such as human resources, physical capital, natural resources and others. In that situation, it makes difficult to predict what the country will export with free trade. As there are more than one product in the whole world. Each of the country has the possibility to become a net exporter in the international trade, those factors of production with which it is better endowed than the rest of the world. However, this statement does not translate directly into “comparative advantage” in particular goods.

Third, elementary models normally exclude non-traded goods. This omission becomes especially significant when a country experiences a resource boom such as Azerbaijan and Kazakhstan. Export prices of natural resources are higher than production costs by the amount of the resource rent. With the quick rising in the foreign exchange revenues from exports of products, the domestic currency tends to appreciate as more demand for domestic currency, rendering non-resource exports less competitive and making price of imports cheaper. Factors of production will therefore shift from the production of non-resource exports and import-competing goods to the production of non-tradable.

Fourth, elementary models of international trade assume that factors of production cannot move across borders. But in reality, there are large number of labor migrants from Central Asia, which are work mainly in Russia, attest to the fact that, when products are costly to exchange as a result of geology and approach initiated obstructions, it might be less demanding for individuals to move in response of worldwide wage differentials. In some ways, the economic effects of greater opportunities for migration are similar to a natural resource boom. Migrants from abroad not only spend money on imports, but also on domestically produced goods and services. Increasing demand for non-traded goods will cause appreciation of the domestic currency, cheaper import’s price, and less competitive export’s goods.

From the case study of Changing Revealed Comparative Advantage: a case study of Footwear Industry of Pakistan, the author stated that the limitation of using the comparative advantage index is that it is a partial equilibrium framework and a static situation for analysis. It provides only general direction of movement and do not anticipate the potential future relative favourable position specifically part of economy or of a nation. Trade barriers is the one that may affect the trade pattern.

The Changing Trade and Revealed Comparative Advantages of Asian and Latin American Manufacture Exports is based on the arguments in Balassa’s ‘stages of comparative advantage thesis’, Bender and Li (2002) studied the period of 1981-1997 for the performance of manufactured exports in a number of Asian and Latin American economies and examined the revealed comparative advantage indices of economies from Southeast Asia, Latin America and East Asia. They argued that whilst RCA indices do not distinguish between the factor endowments effects from the trade policy effect, RCA measures nevertheless provide an indication on the movement in a region’s comparative advantage. The paper’s experimental proof presumed that, in spite of the solid fare execution experienced by East Asian economies, these economies were likewise losing their near preference to the lower level economies in Southeast Asia and Latin America. The RCA is primarily based on relative export shares that could be one-sided because of twists from various trade and non-trade barriers (Bender and Li, 2002). For instance, trade distortions in the form of exclusive production rights given to a certain country or industry may cause that country or industry to have RCA in that particular product. A decent case might be the elite beneficial rights claimed by Swaziland to deliver and trade coke glue syrup through permit. In this case, it is true that in the case of withdrawal of the license, RCA in exportation of this syrup will radically fall, if not vanish.

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