How does globalization have an effect on comparative benefit?
Globalization has made the concept of comparative advantage more relevant than ever. Comparative advantage is defined as the ability of one country to produce a good or service more efficiently and cheaply than another country. Economist David Ricardo defined the theory of comparative advantage in his 1817 book On the Principles of Political Economy and Taxation.Factors influencing comparative advantage include labor costs, capital costs, natural resources, geographic location, and labor productivity.
Comparative advantage has influenced the way economies work since countries first traded with one another many centuries ago. Globalization has brought the world together by encouraging more inter-nation trade, more open financial institutions, and a greater flow of investment capital across international borders. In a globalized economy, countries and companies are more interconnected than ever. Fast and efficient transport networks have made it possible to ship goods inexpensively all over the world. The global integration of financial markets has drastically reduced the barriers to international investment. The almost instantaneous flow of information over the Internet enables companies and traders to exchange knowledge about products, production processes and prices in real time. Taken together, these developments improve economic performance and the opportunities for industrialized and developing countries. These factors also result in greater specialization due to comparative advantage.
Less developed countries have benefited from globalization by taking advantage of their comparative advantage in labor costs. Companies have relocated manufacturing and other labor-intensive activities to these countries to benefit from lower labor costs. Because of this, countries like China have seen exponential growth in their manufacturing sectors over the past few decades. Countries with the lowest labor costs have a comparative advantage in basic manufacturing. Globalization has benefited developing countries by creating jobs and capital investment that would otherwise not have been available. As a result, some developing countries have made faster progress in terms of job growth, education levels and infrastructure improvements.
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 nations have a comparative advantage in capital and knowledge intensive industries such as professional services and advanced manufacturing. They have also benefited from inexpensively manufactured components that can be used as input to more advanced equipment. In addition, buyers in advanced economies save money by being able to buy consumer goods that are cheaper to manufacture.
Opponents of globalization argue that middle-class workers cannot compete with low-wage workers in developing countries. Low-skilled workers in advanced economies are disadvantaged as the comparative advantage in these countries has shifted. These nations now only have a comparative advantage in sectors in which employees need more education and flexibility as well as the ability to adapt to changes in the world market.