Leadership Theory: Benefits of Comparative Advantage

Comparative Advantage
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Comparative Advantage
Comparative advantage is the ability of an economy to produce specific goods or services at a reduced opportunity cost compared to its trading partners. In particular, producing commodities at a lower price gives a firm or country a competitive advantage since it can sell them at a lower price. A comparative advantage enables a company to sell services and products at a decreased price, making it realize more profits since the firm is likely to perform better than its competitors. A low opportunity cost for a commodity or service means that the firm can sell its products more than its business rivals. Comparative advantage can significantly contribute to economic growth and expansion since neighboring countries can share knowledge to enhance their penetration into the global market.
Government regulations significantly affect the comparative advantage. In particular, numerous developing nations set up special economic zones that help in developing capital-intensive industries. In these regions, the conditions of production factors are different from that of other areas. For instance, the local government budget can constrain the supply of capital in non-economic zones. Additionally, the labor movement can be impeded by government regulations. The development of economic zones gives companies a comparative advantage since all the resources required for effective production are provided in these regions. Specifically, in developing and developed countries, land-use regulations and uneven distribution of amenities significantly affect the prices of products or services (Dong & Wong, 2017). Companies that operate in economic zones have a comparative advantage as opposed to those outside these regions. The government ensures that the established areas have a local concentration of resources required in the production, which gives firms in these regions an upper hand in trade. When it comes to skilled and talented employees, they are more attracted to industrialized regions. In particular, regionalization influences a country's trade volume, pattern, and welfare. When companies get necessary resources from within, their production cost lowers. In that light, they produce high-quality products and sell them at a reduced price, making them likely to maximize their profit margins.
Pauline Lectard and Eric Rougier ask a significant question of whether developing nations can benefit by defying comparative advantage. Export sophistication and diversification have proved to be significant factors for productive transformation in developing economies (Lectard & Rougier, 2018). The above two elements emanate from joint dynamics of comparative advantage and capital accumulation in factor markets and competitive goods based on the standard trade theory. At this juncture, the authors focus on developing countries in the same economic bloc. They suggest that these countries should implement policies that defy comparative advantage to foster the diversification of exports and productive transformation. The economic policy second-best theory argues that market incentives and price equalization can limit the productive transformation of an economy. Lectard and Rougier make it clear that comparative advantage can restrict economic growth where companies in the same economic bloc have exhausted the available resources. Governments in developing nations should emphasize the implementation of sectoral subsidies (Lectard & Rougier, 2018). Additionally, they can attract vertical foreign direct investment (FDI) to foster export sophistication and diversification. Comparative advantage reduces the opportunity cost, leading to the production of cheaper products and services. However, a prolonged period of using the existing resources without updating them can be detrimental to the economy, particularly in the digital era when technology is rapidly changing.
Most developing countries have considerably defied comparative advantage in the last three decades and attracted vertical FDI in targeted processing and manufacturing activities. Similarly, if an organization implements a new technology, it is likely to lower its production cost due to effective and efficient manufacturing. Nevertheless, suppose the company stays with that technology for ten years. In that case, it is unlikely to benefit from it since other firms would have acquired better and more updated equipment, hence getting a comparative advantage. That's why Lectard and Rougier assert that comparative advantage is effective in the short term but can stagnate productivity in the long run. Developing countries that need to develop beyond the set limit should defy comparative advantage. Notably, they should upgrade their export structure by embracing comparative advantage in the short term and defy it in the long term. Based on Ohlin-Vanek (HOV) factor-based model, the export structure should be determined by following the comparative advantage (Lectard & Rougier, 2018). In a monopolistic competition environment, entrepreneurs and companies encounter critical entry costs to catch up with the industrialized economies that have already acquired technological capabilities via experience and learning. Consequently, developing nations should defy comparative advantage to upgrade their exports and products instead of waiting to obtain all necessary physical and human capital.
Ryan Murphy defines economics as whatever has the comparative advantage for an economist. Based on the two by two social science matrix taxonomy, the primary factors about the economy include behavioral economics, conventional economics, and heterodox approaches (Murphy, 2020). Notably, the rational choice theory posits that people make choices by following their self-interest so that they can get maximum benefits. That's why many companies are established in the trading zones to benefit from a variety of resources provided in these regions, which cannot be obtained elsewhere. Everyone agrees that some of the issues affecting the economy are inflation, international trade determinants, and labor markets. The author focuses on comparative advantage via the maximizing agent lens. The government plays a significant role in controlling the factors that affect the economy. For example, comparative advantage can be realized by setting up trading zones and providing necessary resources for organizations. One of the primary things that make comparative advantage challenging is the lack of pulling resources together. When businesses are established remotely, they undergo high production costs that limit them from experiencing the benefits of comparative advantage. For instance, they experience problems transporting raw materials. That's why Murphy depicts that comparative advantage is whatever that benefits economists.
Peter Debaere asks an exciting and significant question of whether water is a source of comparative advantage. For sure, animals and plants cannot survive without this essential resource. Specifically, many individuals, if not all, would agree that water is life. The freshwater scarcity has been attributed to the recent severe drought in some farming states in the United States of America (USA). In reality, the prices of food have been steadily rising amidst droughts (Debaere, 2014). Scientists have stated that the primary challenge that the world is bound to encounter in the future is the l...