Throughout of producer into consideration, rather than the needs

Throughout the years, the theory of comparative advantage has always
been the theoretical basis for the international trading systems. But in the
reality, worldwide trades nowadays do not follow under the theory of
comparative advantage; yet, the absolute advantage is which serving as the main
engine during the trades.

Comparative theory means that the producer should produce goods
which given them less opportunity costs compare to other producers, thus
produce more of this product to trade with others to further enhance its
profits. For example: Producer 1 needs 10 hours to produce 1 bike and 5 hours
to produce 1 cake; on the other hand, Producer 2 takes an even longer period of
time which is 50 hours to produce 1 bike and 10 hours to make 1 cake. On the
surface, it seems like either bike or cake, Producer 1 has higher efficiency in
producing all of them. Yet, after take a closer look at the opportunity cost
for each producer, people can find out that Producer 2 actually has comparative
advantage in producing cake in comparison: the opportunity cost of producing 1 cake
means producing 0.5 less bike for Producer 1, and the opportunity cost for
Producer 2 of producing 1 cake is only 0.2 less bike.

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According to the theory, Producer 1 should only focus on producing
bikes and Producer 2 should only focus on producing cakes, and both producers
will be benefited in the end. But does this actually happen in real life? Not
necessarily. Take the example of UK and India: UK has the absolute advantage of
producing both bikes and cakes compare to India. Yet, they did not follow the
theory of comparative advantage to producing one single product which has lower
opportunity cost then trade with each other. In practice, if there was no tax
and other regulations in trading, UK would probably take over both bike and
cake markets of India due its high producing efficiency and product quality.

There are two main misconceptions about the theory of comparative
advantage: first, the theory only takes the efficiency of producer into
consideration, rather than the needs of consumers. As mentioned in the example
above, Producer 1 takes about 5 hours to make 1 cake and Producer 2 takes about
10 hours on the other hand. If both cakes are exactly the same in terms of flavor,
appearance, and scales, the cake which produced by Producer 1 would definitely
cheaper because of its high productivity. Thus, most of customers will prefer
to purchase the cheaper cake, and the cake which produced by Producer 2 will eventually
eliminated by the general public. The comparative theory focused more on the
viewpoint of the producer, rather than the viewpoint of the customer, which is
why it might not work in real life markets.

Second, the theory of comparative advantage neglected the natural
selection in the real life market. In today’s free trade market-oriented
economy, while competitions bring companies profit, it is also mercilessly enough
to sweep the losers out of the market. This is all about the absolute advantages:
if the producers can create products which have amazing quality with reasonable
price, they will definitely survive in the competition and keep expanding their
businesses; vice versa, if the producers make similar quality products, yet
sell for even higher price due to its low efficiency, they will be eliminate by
the markets. Again using the example above: Producer 1 has absolute advantage
in both producing bikes and cakes; even though Producer 2 has comparative advantage
in producing cakes, Producer 1 will not automatically give up in producing
cakes since there are still profits can be made from the market. Thus the
comparative theory again showed that it does not match the rule of competition
in real life.

In
conclusion, the theory of comparative advantage is served more as a theoretical
basis of the international trade market; the absolute advantage is the ultimate
rule of thumb which keeps the trade going in the reality. Yet, the absolute
advantage does not refer to the trades within all the countries in the world; rather,
referring to the two parties in the trade. The essential idea of international free
trade market is to enhance cultural communication, promote social development, improve
production efficiency, and more importantly keep peace in the world. No matter
the comparative theory is precise enough or not, we should always try our best
to maintain a healthy trading environment for our future generation.