International trade refers to the exchange of goods and services and capital beyond international territories or borders. It is based on a country’s level of specialization. Comparative advantage is a concept that exists in a situation where a country produces a product at a lower cost compared to other locally produced goods, than another country. International trade is said to occur using comparative advantage if a country at a lower opportunity cost, efficiently specializes in production goods it trade with its partners. Some of the pros and cons of conducting trade applying the theory of comparative advantage are listed below.
Pros
- It leads to economic growth of a country, which consequently results into improved living standards of the people living in the trading partner countries.
- Using comparative advantage in production, allows a country to produce products, which they excel at, thus ensuring efficiency and productivity in production.
- A nation is able to venture into new markets for its specialized goods and services. This is because it will be able to produce more quantity of good than it previously did, and can now export goods to new markets.
- Improvement of the relationship that exists between trading nations. This is because the trading partners supplements the production activities of each other.
- Competition between trading nations promotes the reduction of prices of goods and services being exchanged.
Cons
- Heavy dependence on the few products that a country produces might hurt the economy, in case of a fall in demand.
- High dependency on another country resulting from production stoppage pose a threat of shortage and could crumble the economy if the trading relationship soured.
- It harms the small local businesses that deal with production of goods and services that the nation does not specialize in the production.
One of the externalities associated with international trade is intra-industrial and inter-industrial production externalities. This arises from knowledge spillovers due to specialization in production. Another externality is the network externality resulting from technology and telecommunication trading by countries. One significant positive externality is the improvement of global equity and efficiency. Nations are able to trade in the same platform with equal stakes in the resulting benefits
Analysis
Liberia main exports trading partners in the year 2012 were China (24.2%), U.S (15.4%) and Spain (11.1%). Its top 3 import trading partners were South Korea (26.4%), China (24.1%) and Singapore (23%) for the year 2012. Commodities exported by Liberia include timber, diamonds, rubber, iron, coffee and cocoa. Its imports include chemicals, machinery, manufactured goods, fuels, foodstuffs and transportation equipment like ships and boats. The total dollar amount of imports by Liberia in the 2012 amounted to $2.275 billion compared to $2.068 billion in 2011. The total dollar amount of exports in 2012 was $774.8 million compared to $645.7 million in 2011. The data shows that there is a trend of both imports and exports increasing with time. Liberia’s is enjoying high growth due to the commodities it exports having favourable prices in the international markets.
Conclusion
It is evident that a country should exploit its comparative advantage in production in order to gain a competitive advantage when transacting across territorial borders. Liberia has a comparative advantage in producing agricultural products, and this has seen it exports increasing amounts to the outside world. This has improved its GDP benefited from various positive externalities of international trade. The country, however, should try to develop its industrial sector in order to minimize the outflow through exports of industrial products.
Works Cited
CIA. The World Factbook: Liberia. 2013. 3 December 2013. <https://www.cia.gov/library/publications/the-world-factbook/geos/li.html>.
Lyn, Gary and Andrés Rodríguez-Clare. "Marshallian Externalities, Comparative Advantage, and International Trade." 15 January 2012. The Pennsylvania State University. Document. 3 December 2013. <http://www.personal.psu.edu/gal154/Job_Market_Paper_GaryLynA_Draft.pdf>.
Simoes, Alexander. "Learn More About Liberia." 2012. The Observatory of Economic Complexity. 3 December 2013. <http://atlas.media.mit.edu/country/lbr/>.
Swartz, Anna. "International Trade Debate." 2013. Scribd. Document. 3 December 2013. <http://www.scribd.com/doc/125571240/International-Trade-Debate-docx>.
Wong, Kar-yiu. "Externality in the Theory of International Trade: Some Basic Concepts." TamKang Monogragh. Seattle: University of Washington, 7 August 2000.
