Posted: March 24th, 2023

International Trade and the Law of Comparative Advantage

The law of comparative advantage focuses on the countries that are capable of producing goods at the least opportunity cost compared to their competitors in the international market. The concept is crucial because it determines the advantage of an economy over another in creating commodities. Trading partners specialize in products that they can manufacture at a lower opportunity cost, allowing them to exchange with others.

Exporting more while importing less is an ineffective approach for any economy. Attracting fewer goods into the country would disadvantage others by reducing the currency necessary to buy the exports. The strategy also affects the volume of commerce between trading partners. Therefore, for an optimal international market, nations must import and export goods and services more equally to maintain the balance of trade.

If consumers in the United States demand more bicycles at a lower international price, the country would import more. The price in the nation would decline to meet the global price. Therefore, consumers would benefit while producers would lose, but the former’s gains would outweigh the latter’s loss. The situation would create a balance in the economy.

Economists present various arguments for the use of tariffs in the international market, such as supporting growing economies, reducing the level of unemployment in a country, financing global trade, and enhancing national security. Therefore, tariffs are critical in businesses across national borders.

Subsidies initiate unfair competition by creating an artificial reduction in the cost of goods. The process transfers the income from the taxpayer to the exporter. It does not reduce the production cost; hence, society upholds the opportunity cost. The regulator subsidizes inefficient producers, relative to those in other economies, and exports goods in which they lack a comparative advantage.