Theoretical Framework of Comparative Advantage Theory in Trade

The global economic framework has experienced considerable dynamics over the centuries owing to the changes and traits in the economic activities across the globe. Much of these changes and development of the economic scenario across the globe, as it is in the contemporary period, can be attributed to the international phenomena like Globalization as well as to the country specific economic dynamics and policy frameworks (Gopinath, Itskhoki, and Neiman 2012). Over the years, Globalization as well as liberalization of the trade and industrial sectors of the countries across the globe, clubbed with the technological and infrastructural advancements has led to greater integration and inclusiveness in the global economic framework.

Owing to these dynamics, the global commercial and trade dynamics have also changes considerably. The above-mentioned phenomena have considerably facilitated setting up of intra as well as inter-country trade connections among the economies across the globe (Hanson 2012). This in turn has resulted in significant changes in the modes of trade as well as the nature of the goods and services exchanges among the different countries in the current multidimensional and multilateral global commercial scenario.

Given this scenario, the trade theories have also developed considerably in the economic theoretical framework and these theories have considerable practical relevance with the trade relations and activities of the countries in the contemporary scenario. Keeping this into consideration, the concerned essay tries to analyse the trade dynamics of the United Kingdom under the theoretical framework of the “Comparative Advantage Theory” of international trade, thereby analysing the sectors in which the country enjoys trade advantages and in which it is comparatively disadvantages, which in turn shows the trade balances of the country.

To understand the trade scenarios and dynamics faced in the commercial and trade sectors of the concerned country, United Kingdom, it is of utmost importance to elaborate the theoretical framework in the international trade scenarios which in turn is expected to help in understanding the advantages and disadvantages arising out of the international trade in the United Kingdom and also in analysing the industry specific trading trends of the country with its trading partners and the changes in the same with time (Feenstra 2015). In this context, the most popular and robust trade theory exiting in the economic conceptual framework is that of the theory of “Comparative Advantage” in trade, as proposed by David Ricardo.

The Comparatively Advantage theory highlights the concept of opportunity cost in production of commodities and services. According to the assertions of the theory, opportunity cost refers to the cost of one additional unit of a commodity in terms of the number of other commodities the production of which has to be foregone in producing the additional unit of the former commodity (Levchenko and Zhang 2016). According to the theory, a country should thus produce those commodities in which they have to incur less opportunity cost and exchange these commodities with those produced by other countries in which the opportunity cost of production is higher for the concerned country. According to the assertions of the Comparative Advantage Theory, trading in this method can help in increasing the total global output as well as individual welfare of each of the trading partner countries (Laursen 2015).

Trade Dynamics of the United Kingdom

Keeping the theoretical assertions of the Comparative Advantage Theory into consideration, this section of the essay tries to discuss the trade dynamics in the United Kingdom. Being one of the most developed and industrially and commercially sound economies in the global scenario, the country has experienced considerable development and modifications in its trade sector with time, setting up long term and sustainable widespread commercial relationships with almost all the significant economies of the world.

In the current scenario, the country has experienced considerable dynamics with the changes in the nature of goods and services produced and consumed within the country as well as with the changes in the preferences of international population. The trade sector of the country comprises a significant share of the Gross Domestic Product of the country, over the years, which can be seen from the following figure:

The considerable share of this sector in the total economic output of the country in turn indicates towards the extreme importance of the trade sector in the economic growth of the country over the years (Wagner 2012). The trade dynamics however, is consisted of both export as well as import activities as the country not only exports commodities and services but also imports a considerable amount of their consumption commodities, with the volume of the same increasing over the years, which can be shown with the help of the following figure:

As is evident from the above figure, over the years the volume of imports has increased considerably in the United Kingdom, while the exports have faced fluctuations, the general trend showing moderately positive dynamics. The exports have however decreased to some extent in the last couple of years. The increase in the imports of the country can be attributed to several reasons, of which the primary ones being an increase in the demand of products which are not produced in the country and also the decrease in the import tariff rates of the country, which can be seen from the following figure: 

From the above figure it is evident that the country has over the years reduced the import tariff rate considerably to facilitate imports of goods and services. This has been done by the country also to build up robust relationships with the other trading partners in the global scenario. This in turn has facilitated the increase in the amount of imports in the country over the years.

Commodity Trade Dynamics

The primary countries with which the United Kingdom maintain sustainable trading relations, both export and import, can be seen from the following figures:

In fact, the amount of import of the country has been increasing faster than that of the amount of exports with time, thereby giving rise to negative trade balance, which is calculated by deducting the valuation of imports of a country from that of the volume of exports of the same. Over the years there has been a significant decrease in the exports of commodities and final consumption of goods, which can be shown with the help of the following figure, showing the changes in the exports top ten products, which the country used to export to other countries: 

As is evident from the above figure, the commodities which used to form a considerable share of the export basket of the United Kingdom, has been decreasing considerably with time, thereby indicating towards the fact that the country has been experiencing a decrease in the comparative advantage in its commodity sectors, especially in the sectors like gold, oil and minerals, crude oils. However, there has been moderate increase in the exports in the automobile manufacturing sector of the country.

However, the country at the same time has been experiencing an increased demand in the international scenario especially of the different components of the service basket which it produces and exports (Pelling 2016). The country has been emerging as one of the primary countries experiencing considerable success in the exports of the different services which primarily include the travel and tourism industry, business and financial services, services provided by the insurance sectors along with services in the information technology, communications and also media and design. The share of the different services in the service export basket of the country can be seen as follows:

From the above figure it can be seen that the trade balance of the country in terms of commodities and consumables has been decreasing due to the increased imports of these commodities. On the other hand, the trade balance of the service sector has been seen to be positive due to the increase in the relative share of export over import of the same in the country (Gibson and Thirlwall 2016). However, the share of negative trade balance in the commodity producing sector outdoes that of the share of negative trade balance of the service sector of the country.

Nevertheless, the country can be asserted to enjoy a comparative advantage in the service sector, with increasing exports over imports in the same while UK has been considerably losing its comparative advantage in the production of different commodities, especially in the manufacturing sector with time, as can be seen from the increased imports in these sectors (Yarbrough and Yarbrough 2014).

Conclusion

From the above discussion it can be asserted that the United Kingdom, being one of the most dynamic and robust economies in the global scenario, has experienced considerable fluctuations in their trading scenario with a shift in the comparative advantage of the production and exports of the country from the manufacturing commodities to that of the different services including hospitality, tourism, health and others. However, the overall trade balance of the country is seen to be negative, given that the share of negative trade balance of the commodity sector is higher than the positive trade balance of the service sector of the country.  

References

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