For a country to become richer or less poorer, it must increase it production of goods and services putting to good use its available productive resources. Efficiency in resource use is achieved through specialization. Under specialization an individual an enterprise (farm or factory) or a country tends to work at the occupation for which it is most suitable in terms of training skill, resources, character etc.
Through specialization incomes are maximized which can be exchanged for goods and services produced other specialists. Specialization then leads to the need for a market in which goods and services can be exchanged. The opposite of specialization is autarky or self sufficiency which are obviously inefficient.
Within the sphere of international trade, it is advantageous for any two or more trading countries in each to produce and supply products which it can produce efficiently and to supply each other through trade.
Even if a country has absolute advantage in the production of all its commodities the principle of specialization requires that it concentrate on the product in which its relative superiority in greatest while the other countries concentrate on the product in which their relative inferiority is least. As a result, there will always be an incentive for specialization and trade between countries and even the least efficient producer can gain from trade.
The problems in pursuing comparative advantage are as follows:
- This doctrine is valid in the case of a classical competitive market characterized a large number of informed buyers and sellers and homogenous products in each market, with world market places serving as efficiency determinants for global allocation of resources to their most suitable uses.
Unfortunately, world markets and their prices are largely inefficient showing influences of trade barriers, discrimination and market distortions.
- Individual countries systematically aim at maximizing their potential gains from trade rather than with optimizing the allocation of world resources.
- By pursuing gains from trade in the short run young nations may jeopardize long term development prospects because:
i) It is important to protect infant industries to acquire new skills, technology and home markets which are necessary in the early years of industrial development;
ii) Concentrating on short term comparative advantage may lead to internalizing wrong externalities eg. promoting use of illiterate peasants and primary sector production;