[Assam] H1B visa: Theory of Comparative Advantage; GATS

umesh sharma jaipurschool at yahoo.com
Sun Apr 8 18:36:10 PDT 2007

  This is why tea must be produced only in China? --- but this is no law -- it may be becos Chinese tea is better or cheaper to produce.
   Free Trade is must in goods and services -free movement of labor AND capital. Not just GATT but it is GATS that must be developed http://en.wikipedia.org/wiki/GATS 
  what would that mean for Assam or Nagaland - that they should focus on some goods and services production for which opportunity cost is lower -compared to opportunity costs for producing them in rival economies.
      http://en.wikipedia.org/wiki/Comparative_advantage       http://internationalecon.com/Trade/Tch40/T40-0.php   In his example Ricardo imagined two countries, England and Portugal, producing two goods, cloth and wine, using labor as the sole input in production. He assumed that the productivity of labor (i.e., the quantity of output produced per worker) varied between industries and across countries. However, instead of assuming, as Adam Smith did, that England is more productive in producing one good and Portugal is more productive in the other; Ricardo assumed that Portugal was more productive in both goods. Based on Smith's intuition, then, it would seem that trade could not be advantageous, at least for England.   However, Ricardo demonstrated numerically that if England specialized in producing one of the two goods, and if Portugal produced the other, then total world output of both goods could rise! If an appropriate terms of trade (i.e., amount of one good traded
 for another) were then chosen, both countries could end up with more of both goods after specialization and free trade then they each had before trade. This means that England may nevertheless benefit from free trade even though it is assumed to be technologically inferior to Portugal in the production of everything.   As it turned out, specialization in any good would not suffice to guarantee the improvement in world output. Only one of the goods would work. Ricardo showed that the specialization good in each country should be that good in which the country had a comparative advantage in production. To identify a country's comparative advantage good requires a comparison of production costs across countries. However, one does not compare the monetary costs of production or even the resource costs (labor needed per unit of output) of production. Instead one must compare the opportunity costs of producing goods across countries.   A country is said to have a comparative
 advantage in the production of a good (say cloth) if it can produce cloth at a lower opportunity cost than another country. The opportunity cost of cloth production is defined as the amount of wine that must be given up in order to produce one more unit of cloth. Thus England would have the comparative advantage in cloth production relative to Portugal if it must give up less wine to produce another unit of cloth than the amount of wine that Portugal would have to give up to produce another unit of cloth.   All in all, this condition is rather confusing. Suffice it to say, that it is quite possible, indeed likely, that although England may be less productive in producing both goods relative to Portugal, it will nonetheless have a comparative advantage in the production of one of the two goods. Indeed there is only one circumstance in which England would not have a comparative advantage in either good, and in this case Portugal also would not have a comparative advantage in
 either good. In other words, either each country has the comparative advantage in one of the two goods or neither country has a comparative advantage in anything.   Another way to define comparative advantage is by comparing productivities across industries and countries. Thus suppose, as before, that Portugal is more productive than England in the production of both cloth and wine. If Portugal is twice as productive in cloth production relative to England but three times as productive in wine, then Portugal's comparative advantage is in wine, the good in which its productivity advantage is greatest. Similarly, England's comparative advantage good is cloth, the good in which its productivity disadvantage is least. This implies that to benefit from specialization and free trade, Portugal should specialize and trade the good in which it is "most best" at producing, while England should specialize and trade the good in which it is "least worse" at producing. 
  Some might like my college textbook by Bo Sodersten of Univ of Lund (a name unpronouciable by Hindi speaking folks due to its obscene meaning in Hindi)
  Why International Trade (his paper) helps poor countries only if implemented properly. Good all 3 pages
  http://www.amazon.co.uk/International-Economics-Bo-Sodersten/dp/0333612167/ref=cm_lmf_tit_6/026-7821665-1538835  Book I read in college as part of a course in International Economics.
  http://www.blackwell-synergy.com/doi/pdf/10.1111/j.1467-9701.1994.tb00760.x?cookieSet=1 another paper on another topic

Umesh Sharma

Washington D.C. 

1-202-215-4328 [Cell]

Ed.M. - International Education Policy
Harvard Graduate School of Education,
Harvard University,
Class of 2005
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