Ricardo's theory of comparative advantage

Introduction

James March, a Nobel Prize-winning behavioral scientist, first authored the concept of comparative advantage theory in his 1968 book Organizations. The theory is also known as economic theory or Ricardian theory. It states that when two countries (or organizations) can produce similar things, they should focus on producing the items in which they have a comparative advantage. In other words, they should specialize and produce only items in which they are better at than their competitor. By doing so, each country (or organization) can maximize its efficiencies, reap higher profits and gain greater market share, regardless of the competition.

Background

The concept of comparative advantage theory originated in the 19th century in the work of English economist David Ricardo, who first presented the theory in his 1817 book On the Principles of Political Economy and Taxation. Ricardo argued that it is to the advantage of two countries to trade if each could produce certain goods more efficiently than the other. This is because both countries would benefit from the exchange of goods.

In the mid-20th century, the rise of globalization and the growth of multinational companies made the concept of comparative advantage more pertinent than ever. Companies had to make decisions regarding which markets they wanted to target and in which products they had a major competitive edge. It was during this era that business theorists proposed the concept of comparative advantage as an answer to this problem. They argued that a company should focus on the markets where it has a comparative advantage, even if its competitors had stronger overall capabilities.

The Theory

The main premise of the comparative advantage theory is that there are certain products in which one country (or organization) can produce more efficiently than another, even if it has a lower overall productivity. Comparative advantage is based on productivity and cost differentials, not absolute competitive advantage. This means that both countries can still benefit from trading, even if one is significantly more productive than the other.

The theory is also based on the idea that competitive advantage is not static; rather, it changes over time. A company (or country) may have a comparative advantage in a certain product today but may not have an edge tomorrow. This is why organizations must constantly analyze their markets and adjust their strategies as needed.

Comparative Advantage in Practice

The concept of comparative advantage is often seen in business, especially in the global marketplace. Companies often analyze their current market situation and determine which products they can produce efficiently and which ones are more difficult. They may then decide to focus on the items in which they enjoy a comparative advantage and outsource or discontinue those in which they lack an edge.

The theory is also widely used in international trade. Countries often enter into trade agreements based on the premise that both sides can benefit from the exchange of goods. They may specialize in certain products in which each has a comparative advantage, allowing them to offer higher quality products for lower prices. This can both benefit consumers and industries in each country.

Conclusion

The concept of comparative advantage is a key component of global business and international trade. By focusing on the products and markets in which they have a comparative advantage, organizations can gain an edge over their competitors and maximize the efficiencies of their operations. It’s an effective method for businesses to gain market share and capitalize on their strengths. Comparative advantage is also a critical component in international trade, allowing both sides of the deal to benefit from the exchange.

Lee Kuan Yew’s Comparative Advantages Theory

Lee Kuan Yew, the Prime Minister of Singapore from 1959 to 1990, was one of the most influential figures in the world during his tenure. In 2012, Lee introduced a comparative advantages theory that argued that countries should pursue economic policies that focus on the advantages they already have. This theory argued that the advantages countries already had were better suited to their development than those of other countries.

Theessence of Lees theory of comparative advantage lies in the idea that countries should focus on developing the qualities and industries that are uniquely suited to each nations environment and resources. His logic was that a country should focus on what it does well - even if it is only modestly ahead of others - and then use that competitive advantage to develop a national strategy to push further ahead.

For example, Lee argued that Singapore should use its competitive advantage derived from its being a small, open economy and a gateway between East and West. He believed that this should be used to leverage the city’s existing strengths, such as its modern transportation links and business-friendly regulations, to become an attractive option for investors around the world. He ultimately believed that such an advantage should be used to accelerate the nations development and improve its per capita income.

Additionally, Lee believed in the power of education to create competitive advantages. According to Lee, educating workers to a higher standard had the potential to increase a nations productivity and open up new opportunities, while failing to do so would leave a country vulnerable to global competition. Additionally, he held that investing in research and development, technological advancement and the promotion of an internationally competitive labor force can help further extend a nations comparative advantages.

In conclusion, Lee Kuan Yews Comparative Advantages Theory has helped shape Singapores development into one of the most prosperous, industrialized and open economies in the world. His focus on exploiting a countrys unique advantages, investing in education and research, and the promotion of an international labor force has been an invaluable part of Singapores economic success. In doing so, Lee has set a powerful example for other nations to emulate, and has left behind a lasting legacy that will undoubtedly continue to benefit future generations.