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David Ricardo (1772-1823) was a political economist and a successful business man who is recognized for his organized economics ideology. In the early nineteenth century, Ricardo was considered to be one of the most influential economists.
In addition to being an influential figure, David Ricardo was also a Member of Parliament, a strategic investor and a keen sighted entrepreneur whose economic ventures managed to accredit to his name a sufficient amount of wealth.
In his most active years as an economist, he idealized and combined a collection of economic policies that perceived an ideal politico-economic structure.
Among his most significant contributions were the theory on the Influence of demand and supply on prices, theory on foreign trade, theory on value, the law of wages and the theory of comparative advantage.
This paper will take an insightful look at the conceptualization of the theory of comparative advantage as analyzed and applied by another economist, Amartya Sen.
Amartya Sen (1933) is an economist and academician whose contribution to the economic sphere has earned him widespread recognition and several awards. Sen has particular interest in social and developmental economics and has presented several publications and writings that identify economic barriers whilst offering practical solutions.
He identifies several economic and social issues such as unemployment, war, logistics, corruption, hoarding and the decline in wages as the major obstructions to the growth and development of any functional unit.
Among his prominent work is the theory of social choice which basically challenged the voting rules citing that they contradicted the democratic norm.
The comparative advantage Theory
The theory of comparative advantage refers to the capacity of a party to provide a standard good or service at a lower production cost than another party with similar capability.
One can also say that comparative advantage is the ability to come up with a product that is most efficiently created through specialization of a precise product thus overlooking all the other products that could be produced.
Origin in relation to David Ricardo and Amartya Sen
The comparative advantage theory was first used by David Ricardo in 1817 in his book concerning the Principles of Political Economy and Taxation where he used an example of England and Portugal.
Portugal has the resources and the capacity to produce both wine and cloth with less labor and consequently less production cost as compared to England. England lacks the adequate resources necessary to produce wine and is moderately equipped in terms of capacity as far as cloth is concerned but both of these goods are easily produced in Portugal (Dornbusch et al 823).
The structure of the arrangement is that though it is cheaper to produce cloth and wine in Portugal, there is a higher potential for Portugal to produce excess wine which is then used to trade that for English cloth (Chang 56).
The overall outcome is that both nations benefit from the trade arrangement because England continues to produce export cloth at the normal cost and is now in a position to import wine at a lower price which is more or less equivalent to the cost of cloth (Sowell 112).
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It is therefore evident that each country has the potential to benefit through specialization in the production of goods which it has a comparative advantage and use the goods to trade for the goods it needs.
Amartya Sen’s first ostensible on the comparative advantage theory was integrated in his development of economics ideology through the concept of capability that was developed in his article titled ‘Equality of What’.
It seems that Sen’s contemplation was that a stable government should be measured against the existing potential of the nation’s citizens. One can also conclude that development that began with the government then trickled to the citizens would inadvertently trample on the rights of the citizens (Edwards 78).
This is because the government would be forced to impose its will on individuals who did not oblige to its intentions consequently altering the natural laws of progress.
For instance, if the nation’s citizens have an inclination to farm as a source of income, a supposition by the government to diverge them into another activity would inherently be resisted even though the government’s intentions were descent (Cohen 2156).
The government would therefore be required to force the citizens into the particular activity against their will hence breaking functioning barriers such as cultural practices and taboo. The only way that a nation could truly embrace developmental economics was to allow the citizens to identify their own vocational preference (Sowell 110).
The role of the government would therefore be supplementary in providing additional resources and monetary aid to ensure the sustenance and viability of the citizens’ occupational choice.
With the diversity present in each nation in terms of geographical location, culture, norms, code of conduct and interest, specialization would present itself logically without forceful intervention. Citizen can then be considered to act out of personal choice when obstacles such as government interference are removed (Chang 53).
The responsibility lies in the individual societies to maximize on the use of the unique capabilities endowed on each of the societies. It is through this kind of structure that a bottom-up economic growth would be created which is considered to be the most potent in an economically viable nation (Shiozawa 21).
Discussion of The comparative advantage theory
In his book, Principles of Political Economy, David Ricardo was the first economist to deeply engage in the theory of comparative advantage from a theoretical point of view.
A nation would be in a position to gain more through specialization and trade with other nations rather than produce a variety of goods and services even if they are of superior quality (Ricardo 12).
This view is supported by Amartya Sen who included the comparative advantage theory as a solution for hunger alleviation in his contribution in the 1983 Human Development Report, published by the United Nations Development Programme.
Sen suggested that marginalized communities should be prioritized by policy makers in order to empower them economically and to restore the mislaid earnings of the poor.
To accomplish this, the government should maintain stable prices for food but more importantly, the marginalized group should be empowered through public-works projects. The projects should be suctioned and funded by the government and the government would basically allow each of the marginalized groups to specialize on farming a particular crop (Edwards 82).
For instance, the government of India was in 1943 held liable for the three million deaths that were as a result of the Bengal famine even though there was adequate food supply in Bengal at the time.
Amartya Sen in his application of the comparative advantage theory was of the opinion that each community should have a crop they specialize in like wheat, maize, corn or fruits which they could trade and earn while also averting the possibility of hunger in case of drought (Cohen 2158).
As a staunch supporter of political freedom, Sen asserted that functioning democracies can never experience famine because the leaders are much more sensitive towards the needs of the people.
Sen’s theory on comparative advantage offered an abstemious elucidation as to the reason why there is a decreasing number of women as compared to men in India and China in spite of the fact that in the West and in other impartial countries, women lived longer, had better job opportunities, were likely to create wealth just like men, had lower mortality rates at all ages and also made a higher percentage of the general population (Chang 75).
Through the application of Sen’s analysis, it can be observed that women were more likely to be excluded in decision making, their ambitions were not valued and girls had little or no childhood opportunities.
It is only through the empowerment of women that a healthy exchange of idea and tasks through comparative advantage would develop between the sexes leading to faster economic growth in china and India.
The impact of comparative advantage is distributional because it culminates in improved real income per household as well as increased governmental function.
It can be viewed that if every citizenry unit was mutually exclusive in function and in sustenance through the process of specialization, then the excess could be traded off for more needed goods and some stored as investment or for future consumption.
Thus each community would be in a position to protract itself whilst at the same time generating income (Sowell 116). The government is as a result less focused on national maintenance issues and can therefore concentrate on developmental policies and national cohesion (Cohen 2157).
The end result is a nation that is able to sustain itself, a nation that is managed by an efficient government and which has a significant reduction in poverty cases as well. Ricardo’s theory similarly supports this notion an in its practical application, the distributional effects on foreign trade were not in a position to directly affect national income because income was directly proportional to the level of wages.
Ricardo was of the opinion that wages were not to be controlled rather be defined through competition to avoid restrictions on the importation of agricultural products from other countries (Dornbusch et al 826). The overall outcome on the income will as a consequence be favorable since foreign trade will not have an effect on value.
With such notion, comparative advantage can be understood to be a guideline to the means through which trade can create value for the active parties involved even in cases where one party is endowed with more primary resources for production.
Based on the aforementioned view it can be discerned that comparative advantage creates the fundamental structure of modern trade theory that perpetuates the notion that a nation has a comparative advantage in the production of a product if the nation is aptly equipped with the necessary inputs that are primarily used in creating the product.
The theory of comparative advantage as presented by both David Ricardo and Amartya Sen gives the impression that those endowed with capacity and the underprivileged equally give attention to their own custodial clout in order to meet the needs of the richer, more skillful party (Edwards 79).
Even though there is a seemingly unequal exchange, the potent thought is that both contributing parties benefit. An extrapolated opinion is that both parties benefit equally and each party is enabled to concentrate on its own area of bona fide expertise leading to a bi-directional equal trade though the initial perception of purely comparative specialization is in one direction (Ricardo15).
In general, the benefits of such an arrangement and the outcome can be termed as the gains from trade and it is the fundamental model of the theory of global trade.
Amartya Sen deviated slightly from David Ricardo in terms of technicality and the application of the comparative advantage. Sen focused on the application of the comparative advantage on a micro economy whereas Ricardo was more interested on a macro economy (Ricardo 18).
The reason for the analysis has its kernel founded in the works of both economists and the focal points of their subject matter. Sen concentrated on developing economic viable societies through the enrichment of individuals who took on the specialization of production of socially acceptable and accessible products.
He was of the opinion that communities would use the locally available resources to produce superior goods that were tradable with different goods of similar value. Through welfare economics, Sen sought to appraise economic policies relative to their outcome on the interests of the community (Dornbusch et al 832).
His social-economic views can be seen in his works such as the prominent monograph Collective Choice and Social Welfare in1970 which tackled issues concerning individual rights for instance the conception of the moderate paradox, justice and impartiality, majority rule together with the accessibility of information with reference to individual state of affairs.
Sen developed techniques for measuring poverty that were largely based on the comparative advantage and the end result was a wealth of practical data concerned with improving the economic status for the underprivileged (Cohen 2160). On the other hand, the macro economic perspective of Ricardo was fundamentally converse to that of Sen.
While Sen was of a bottom-up approach to economic sustainability, Ricardo applied the comparative advantage in a top-down manner.
Ricardo believed that through the enrichment of a nation as a whole would individuals attain economic freedom. That is the reason why he concentrated on the application of the comparative advantage as a tool of trade between nations rather than communities.
To better understand the strikingly similar yet different perceptions of the two economists, examples are given as to how David Ricardo and Amartya Sen regarded the comparative advantage.
The Amartya Sen Paradigm
Two communities live in remote woodland and in order to stay alive they must undertake a few essential activities like hunting, cooking, building shelter, collecting water and firewood, farming and keeping animals. The first community has many members and many of them are young and strong.
They are more productive, have better shelter, make several hunts and have large tracts of land for farming hence have several benefits in all activities (Cohen 2159). The second community has few members, they have faulty shelter, and they have a small farm and rarely make a successful hunt.
The community therefore has been disadvantaged in a broader sense in all activities. Regardless of the fact that the larger community has gained an unconditional lead in all activities, it is economically not sufficient for either of the communities to work alone because they can both profit from specialization and exchange (Edwards 85).
If the two communities divide the available tasks according to comparative advantage then the larger community will specialize in doing the work that it is most prolific, while the smaller community will focus on tasks which require their expertise and where their productivity is almost equivalent to that of the larger community.
With such an understanding, total production will peak because a given quantity of effort fulfilled by both communities will benefit all (Sowell 117).
The David Ricardo paradigm
If there are two nations of equivalent dimension, for instance Georgia and Finland and both produce and use two goods; wood and iron. The productive aptitude of the nations is such that if both nations dedicated their labor and resources to wood production, Georgia would have 200 tons and Finland would have 500 tons.
In the instance where all the resources of both nations were diverted to the production of iron, Georgia would have 200 tons and Finland would have 300 tons.
With the assumption that each nation has the same opportunity costs while producing wood and iron and both nations are productively active, then there will be no trade between the nations and the price mechanism will facilitate perfect competition (Chang 40).
However, Finland has an unconditional lead over Georgia in the production of wood and iron and no common profit in business operations between the nations since Finland is more efficient at producing of both products.
Georgia’s production cost of producing one ton of wood is one ton of iron whereas Finland’s production cost of one ton of wood is 0.5 ton of iron meaning the cost of one ton of iron is two tons of wood.
Therefore, Finland has a comparative advantage in wood production because of its lower cost of production when compared to Georgia. Georgia has a comparative advantage over Finland in the production of iron, the production cost of which is higher in Finland when compared to wood than in Georgia (Shiozawa 23).
The difference in production costs will lead to mutual benefit if the countries specialize in production and trade bearing in mind that the nations generate and use the products only internally (Edwards 88).
With all other factors constant and there is no conceptualization of the predilection of patrons in both nations that would help in arriving at the final decision of the international exchange rate of wood and iron.
In order for trade to be mutually beneficial, Georgia requires a price of at least one ton of wood in exchange for one ton of iron and Finland requires at least one ton of iron for two tons of wood (Sowell 110). Taking into account the production potential of each nation, the exchange price will then be between the two.
The rest of the arrangement will be dependent on an international trading price of one ton of wood for two thirds ton of iron. If both nations concentrate on the commodities in which they bear comparative advantage, then Georgia will produce 100 tons iron and Finland will produce 300 tons wood and 50 tons iron.
The global production of wood will therefore rise while iron production will remain the same (Chang 51). With reference to the previous exchange rate of one ton of wood for two third ton of iron, Georgia and Finland will be able to trade.
Georgia will achieve 75 tons wood and 50 tons iron while Finland will achieve 225 tons wood and 100 tons iron. Georgia will have traded 50 tons of iron for 75 tons of wood and consequently both nations will have benefited and will be able to now consume at points outside their production prospective levels.
The above example is based on a few assumptions which have to be taken into account. First, the theory is neither limited to two nation, equal size economies nor to two goods.
Ricardo’s comparative advantage theory created space for a larger number of nations and goods, since the fundamental principle is the same regardless of the variables (Ricardo 22). Another assumption is that half of each nation’s existing resources are utilized to produce each good before specialization commenced (Shiozawa 26).
Additionally, if one of the nations has less than the required of factors of production in a functional capacity, then the insufficient capacity gap have to generally be satisfied prior to the application of the comparative advantage analysis (Chang 16).
Transport costs were not factored in and hence the assumption is that the international trade is void of transport cost (Ricardo 34). Furthermore, the opportunity and production costs should not necessarily be identical but the focus on production can only be leveled to the situation at which the opportunity costs in both nations becomes one and the same (Dornbusch et al 831).
In existent economies a cost will be incurred when switching production hence perfect mobility of production factors within countries is absent. The known serenity of production factors amid countries does occur due to diverse rates of output which is enhanced by the dissimilarity in nations’ dynamic possessions.
A nation will bear the comparative advantage in the production of the commodity that requires to a large extent the factor that is in copious supply to the nation (Edwards 93). The presence of international factor mobility has the potential to change a nations’ comparative factor profusion (Dornbusch 839).
However, the principle of comparative advantage is still applicable here, but the nation at an advantage is the one with the ability to change the factor (Chang 15). Perfect competition is factored in as a set assumption that allows entirely proficient distribution of the resources used in production in the conceptualized free market.
David Ricardo can be considered to be the pioneer thought for the comparative advantage which has essentially revolutionized the norms of international trade. Amartya Sen took up the ideology and morphed it into a condensed socio-economic gauge which has help transform the way nations perceive economic growth and development.
Sen has had a powerful influence on governments and the use of the comparative advantage theory as a means to measure poverty and has offered various governments and welfare organizations a practical perspective on how to curb poverty through specialization.
Indeed the comparative advantage theory is basically specialization based with the insistence of mutual trading arrangements to ease cost of production and maximize benefits.
Fundamentally, both David Ricardo and Amartya Sen had a similar basic principle of the comparative advantage theory where both economists focused on the specialization of production between two mutually exclusive parties.
According to both economists, different parties with almost similar production processes would be in a position to benefit more through specialization in a particular production, each then trade the products amongst themselves.
However, Amartya deviates slightly from Ricardo in terms of perception considering that San looks at comparative advantage from a socio-economic standpoint whereas Ricardo takes on a politico-economic perspective.
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Dornbusch, Rooks, Fischer, Peter, & Samuelson, Augustine. Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods, The American Economic Review, Vol.67, No.5, pp. 823-839, 1977. Print.
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