Realism of Traditional Trade theories Essay Example | Topics and Well Written Essays - 1000 words

Realism of Traditional Trade theories - Essay Example It is stated that the factor of the comparative advantage is considered to be the most crucial aspect, which moulds the international trade. (Fedotovs 2010) Thus the writer emphasizes on the fact that comparative type of advantage that has come into play due to globalization, is presently the most important aspect for any country, from a practical as well as theoretical point of view. Many traditional theories as well as models, had been effectively formulated so as to explain the comparative advantage and these have ever since been scrutinized to bring out the evidences empirically. But it is an irony that all these theoretical models have only produced results, which were totally contradictory. Thus the writer attempts to generate empirical evidence by taking the case of Latvia, which is a small country and a member of the European Union. Through the analysis of the empirical evidence, the writer focuses on the present two basic concepts of the International Trade. The two very fam ous models are the Heckscher-Ohlin theorem of factor endowment and the Ricardian model, which explains the concept of comparative advantage. ... This efficiency is really possible, since the countries need to concentrate only on the sectors which they are strong in and concentrate mainly to strengthen those areas. In the case of Latvia this becomes a reality, since the application of the comparative advantage emphasized in the Ricardian model is very much possible. Indeed Latvia has been very successful in following such a trade policy, with respect to the foreign countries strictly abiding by the terms of the international trade. (Fedotovs 2010) Applying the Ricardian Model of Comparative Advantage to Latvia The Ricardian theory strongly believes that with respect to a particular product, any country in the present world due to globalization has got a very good comparative advantage, when compared to other countries if the opportunity cost that is incurred during the production of that good, among a group of goods is very less in that particular country. Thus this can very well be applied in the case of Latvia and is found t o validate the Ricardian theories strength. (Fedotovs 2010) Strengths of Ricardian Model In fact Latvia had joined the European Union only seven years back and when it is compared with the other member states, it was having lesser productivity and it was not so economically developed. But the surprising thing was that, this country had a comparative advantage when the productivity ratio in the case of certain goods was compared, with the other member states. To have a very good advantage with respect to particular product, a country had to have a very high productivity ratio when compared to other countries, as per the Ricardian Model. In the case of Latvia it was very well found out that, timber was the export