COMPARATIVE ADVANTAGE: DAVID RICARDO'S THEORY, MEXICO, COLOMBIA - ECONOMY - 2025

The comparative advantage is an economic term that refers to the ability of an economy to produce goods and services at a lower opportunity cost than trading partners. It is a fundamental principle in international trade theory.

A comparative advantage gives a business the ability to sell goods and services at a lower price than its competitors and earn higher sales margins. The law of comparative advantage is attributed to the English political economist David Ricardo with his 1817 book On the Principles of Political Economy and Taxation.

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In general, a product will be produced in the country where the opportunity cost of making that product is the lowest. That is, in the country where the alternative use of resources is less attractive.

Basically, once a country or company develops a product or service in a more efficient way and at a lower cost, that country or company must focus its efforts on producing that product or service over others. That gives them a comparative advantage.

Production specialization

Comparative advantage is the reason why companies and countries focus on the production of specific goods, such as the cars and trucks made by the United States, or oil production in Saudi Arabia.

The development of other products can be done by importing, using the income from the products they export.

Investor Warren Buffett views comparative advantage as a castle moat. In times of financial difficulties, a country or a company could at least rely on the product they produce well.

Therefore, that country or company can count on that product to act as a defense measure in times of toxic economy.

Investing in human capital is critical to maintaining comparative advantage in this knowledge-based global economy.

David Ricardo's Theory of Comparative Advantage

In economic theory, comparative advantage is one of the most significant concepts. It is a fundamental principle of the thesis that, at all times, all participants can benefit from voluntary trade and cooperation.

The 18th century economist David Ricardo created the theory of comparative advantage. He claimed that a country increases its economic growth by focusing on the industry in which it has the most substantial comparative advantage.

Ricardo developed his theory to combat trade restrictions in England on imported wheat. He argued that there was no point in restricting high-quality, low-cost wheat from countries with the right climate and soil conditions.

England would receive more value by exporting products that required skilled labor and machinery. You could buy more wheat commercially than you could get on your own.

The key to understanding comparative advantage is with a solid understanding of opportunity cost. This is the potential profit someone loses when they select one particular option over another.

The company with the lowest opportunity cost or the smallest loss of potential profit will have this type of advantage.

International Trade

David Ricardo explained that Portugal and England benefited from trading and specializing according to their comparative advantages.

In this case, Portugal was able to make wine cheaply, while England was able to make cloth cheaply. Ricardo predicted that each country would eventually recognize these facts and stop trying to make the product that was most costly to generate.

In fact, over time, England stopped producing wine and Portugal stopped making cloth. Both countries saw that it was an advantage for them to stop their efforts to produce these items locally and instead trade with each other to obtain them.

The theory of comparative advantage explains why trade protectionism does not work in the long run.

Political leaders are always under pressure from their constituents to increase tariffs to protect jobs from international competition.

However, that is only a temporary solution. In the long run, it hurts the competitiveness of the nation. It makes the country waste resources on unsuccessful industries. It also forces consumers to pay higher prices when buying domestic products.

Comparative advantage in Mexico

Geographic location

Major Asian countries, such as Japan, China or Malaysia, take 13-23 days longer to supply the North American and South American market, compared to Mexican companies.

Trade agreements

Mexico has a set of trade agreements that is unique in the world, including free trade agreements with the main world markets: the European Union and the United States, as well as with different countries in Asia and Latin America.

These treaties allow products to be exported under preferential treatment, an advantage that competing countries do not have.

Mexico and United States

The United States is better equipped and more prepared to produce more agricultural products than Mexico. However, the use of comparative advantage and specialization can benefit both countries.

In general, the US can produce more corn, cereals, and other crops than Mexico, but Mexico is very good at producing tropical fruits and some vegetables.

If the United States focuses its energies more on producing corn, grains and other crops, and less on producing tropical fruits and some vegetables, then the excess could be exported to Mexico.

Then if Mexico focuses more on producing tropical fruits and some vegetables, and less on producing corn, grains, and other crops, then the excess can be exported to the United States.

In this way, both countries will produce enough to be self-sufficient and have excess products for sale. Both countries will indeed have the same food supply and both will be in better condition.

Comparative advantage in Colombia

In the category of sustainable comparative advantages over time there is a group of products: fish, whether frozen or fresh, coffee and similar to coffee, and vegetable products, such as flowers and plants.

These three groups of products have the ability to compete against their US counterparts in the domestic market, as well as in the North American market.

Four other groups of agricultural products fall into the category of potentially sustainable comparative advantages over time.

These are mollusks, crustaceans and other aquatic invertebrates, whether preserved or prepared, nuts and fruits (dried or fresh), sugar confectionery, and honey and molasses.

These four groups have the potential to face the competition displayed by the same products from the United States, both in this country and in Colombia.

For this reason, potentially strong points in Colombia are considered in the exchange of agricultural products with the United States.

Targeting

In this scenario, Colombia's economic policy should focus on supporting the consolidation or reinforcement of the comparative advantages of these groups in order to continue reproducing them in the following years.

For example, through measures that benefit the use of fertilizers and therefore productivity.

Similarly, public support in research and development could be improved. This must be considered essential in order to really intensify exports to the United States of agricultural products and this is an instrument at the service of the Colombian economy.

Comparative advantage in Argentina

Argentina offers a solid resource base to attract investment. Qualified human resources with an attractive combination of skills, recognized universities and high capacity research centers.

This provides an excellent supply of high-value natural and industrial resources, at competitive costs, in a developing infrastructure.

Argentina is the eighth country in the world classified in geographical extension and one of the main places that has the largest amount of arable land, in addition to other natural resources such as oil and mining.

Furthermore, Argentina is suitable for fishing due to its many rivers and the 4,000 kilometer Atlantic coast.

Looking for a competitive and comparative advantage, Argentine producers have applied technology to their agricultural activities to optimize the results of their work.

Thanks to agricultural technology, the production contour has grown by 10 million hectares in the last 60 years. Thus, the country has become one of the main exporters of soybeans, wheat, corn, and fruits such as apples, pears or lemons, among others.

Last year, Argentina exported more than 15 million tons of animal and vegetable products to the European Union.

Comparative advantage with Germany

The theory of comparative advantage explains why Argentina specializes in raising cattle, while Germany specializes in making cars.

Let's say that in Germany it takes $ 90,000 in resources to raise 30 cows and $ 30,000 to produce a car. If the Germans decide to raise more cattle, they will be able to make fewer cars. Similarly, making more cars means less livestock.

If Germany decides to raise 30 cows, they stop producing $ 90,000 / $ 30,000 = 3 cars. If they decide to build one more car, they stop raising ($ 30,000 / $ 90,000) * 30 cows = 10 cows.

In Argentina, it takes $ 40,000 to raise 30 cows and $ 20,000 to make a car. Then, to raise 30 cows, they give up producing $ 40,000 / $ 20,000 = 2 cars. To make an additional car, they stop raising ($ 20,000 / $ 40,000) * 30 cows = 15 cows.

Based on that, the cars should be made in Germany. There, fewer cattle (10, instead of 15) are given up for producing one more car. Likewise, cattle are raised more efficiently in Argentina, where fewer cars would stop being delivered.

Comparative advantage in Peru

A nation like Peru excels in producing items like gold, silver, and fish products.

Their success in exporting these products to major trading partners such as the United States, Brazil and China provides the means to import goods and services such as gas, oil, and telecommunications equipment, where they are not good at producing them.

Based on economic theory, this export / import balance gives Peru a comparative advantage in the global economic market.

On the other hand, Peru has the best climate in the world to grow sugar cane, thus making it the first producer in the world.

Mango has ranked as the second largest agricultural product in export volume.

This is because the advantage of being able to export it is taken advantage of during the period that the main exporter in the world, which is Mexico, cannot. Its success is due to the quality of its flavor, firmness and color.

Likewise, Peru has comparative advantages compared to Brazil, the main producer of cane ethanol in the world, since it cannot grow it all year round, but only 6 months, since it has rains greater than 2000mm. annual, affecting the crop in its vegetative progress.

Metals

Additionally, Peru has the comparative advantage of being a polymetallic nation, given the insecurity created by the performance of the Chinese economy and the normality of world financial conditions.

Although China is a particular factor for the prices of metals, especially copper, Peru also produces zinc and other minerals, which are never mentioned and their prices are not falling.

Other examples

China and USA

China's comparative advantage with the United States is in the form of cheap labor. Chinese workers produce simple consumer goods at a much lower opportunity cost.

The comparative advantage of the United States is skilled labor. American workers produce sophisticated goods at lower opportunity costs. Specialization and trade in this sense benefit everyone.

Skill difference

Let's consider a famous athlete like Michael Jordan. This renowned basketball player is an exceptional athlete, whose physical abilities surpass those of most other people.

Jordan could probably paint his house quickly, due to his skills, as well as his impressive height. Hypothetically, let's say Jordan could paint his house in eight hours.

However, in those same eight hours he could also participate in the filming of a television commercial, which would earn him $ 50,000.

On the other hand, Jordan's neighbor Joe could paint the house in ten hours. In that same period of time, he could work at a fast food restaurant and earn $ 100.

In this example, Joe has a comparative advantage, although Michael Jordan could paint the house faster and better. The best thing would be for Jordan to film the TV commercial and pay Joe to paint his house.

Since Michael Jordan wins the expected $ 50,000 and Joe wins more than $ 100, the trade is a winner. Due to their difference in skills, Jordan and Joe will likely find this to be the best arrangement for their mutual benefit.

References

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2. Kimberly Amadeo (2018). Comparative Advantage Theory and Examples. The Balance. Taken from: thebalance.com.
3. Bryson Price (2019). Mexican Trade and Agriculture. Taken from: pricebryson.wordpress.com.
4. Jenny Paola Danna-Buitrago (2019). Comparative Advantages Of Colombia Against The United States: The Case Of Agricultural Products. Banrep. Taken from: banrep.gov.co.
5. Global Alliance of SMEs (2016). Economy and Business in Argentina. Taken from: globalsmes.org.
6. Andina (2014). Peru has a comparative advantage of being a polymetallic country. Taken from: andina.pe.
7. Agrifood Companies (2015). Comparative and competitive advantages in the Peruvian Agroindustry. Taken from: Empresasagroalimentarias2015.blogspot.com.
8. Eumed (2019). The Comparative Advantages of Mexico. Taken from: eumed.net.