How Does Globalization Impact Comparative Advantage?

Globalization has made the concept of comparative advantage more relevant than ever. Comparative advantage is defined as the ability of a country to produce a good or service more efficiently and at lower cost than another. Economist David Ricardo defined the theory of comparative advantage in his 1817 book, On the principles of political economy and taxation. Some of the factors that influence comparative advantage include cost of labor, cost of capital, natural resources, geographic location, and labor productivity.

Comparative advantage has influenced the functioning of economies from the time countries began to trade with each other centuries ago. Globalization has brought the world closer together by encouraging more trade between nations, more open financial institutions and a greater flow of investment capital across international borders. In a global economy, countries and businesses are connected in more ways than ever. Fast and efficient transportation networks enabled the cost-effective shipping of goods around the world. The global integration of financial markets has considerably lowered the barriers to international investment. The almost instantaneous flow of information on the Internet allows companies and businessmen to share their knowledge of products, production processes and prices in real time. Together, these developments improve economic output and opportunities for developed and developing countries. These factors also lead to greater specialization based on comparative advantage.

Less developed countries have benefited from globalization by exploiting their comparative advantage in labor costs. Companies moved manufacturing and other labor-intensive activities to these countries to take advantage of lower labor costs. For this reason, countries like China have experienced exponential growth in their manufacturing sectors over the past few decades. Countries with lower labor costs have a comparative advantage in basic manufacturing. Globalization has benefited developing countries by creating jobs and capital investment that otherwise would not have been available. As a result, some developing countries have been able to make faster progress in terms of employment growth, educational attainment and improved infrastructure.

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advanced economies, like the United States, Canada, Japan and much of Europe, have benefited from globalization in many ways. The concept of comparative advantage has provided the intellectual basis for most trade policy changes in developed countries over the past half century. These countries have a comparative advantage in capital-intensive and knowledge-intensive industries, such as professional services and advanced manufacturing. They have also benefited from low-cost manufactured components that can be used as inputs in more advanced devices. Additionally, buyers in advanced economies save money when they can buy consumer goods that are cheaper to produce.

Opponents of globalization argue that middle-class workers cannot compete with low-cost labor in developing countries. Low-skilled workers in advanced economies are disadvantaged because the comparative advantage of these countries has shifted. These nations now have a comparative advantage only in industries that require workers to be more educated and to be flexible and adaptable to changes in the global marketplace.