Leadership Theory: Benefits of Comparative Advantage

Comparative Advantage
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Comparative Advantage
Comparative advantage is the ability of an economy to produce specific goods or services at a reduced opportunity cost compared to its trading partners. In particular, producing commodities at a lower price gives a firm or country a competitive advantage since it can sell them at a lower price. A comparative advantage enables a company to sell services and products at a decreased price, making it realize more profits since the firm is likely to perform better than its competitors. A low opportunity cost for a commodity or service means that the firm can sell its products more than its business rivals. Comparative advantage can significantly contribute to economic growth and expansion since neighboring countries can share knowledge to enhance their penetration into the global market.
Government regulations significantly affect the comparative advantage. In particular, numerous developing nations set up special economic zones that help in developing capital-intensive industries. In these regions, the conditions of production factors are different from that of other areas. For instance, the local government budget can constrain the supply of capital in non-economic zones. Additionally, the labor movement can be impeded by government regulations. The development of economic zones gives companies a comparative advantage since all the resources required for effective production are provided in these regions. Specifically, in developing and developed countries, land-use regulations and uneven distribution of amenities significantly affect the prices of products or services (Dong & Wong, 2017). Companies that operate in economic zones have a comparative advantage as opposed to those outside these regions. The government ensures that the established areas have a local concentration of resources required in the production, which gives firms in these regions an upper hand in trade. When it comes to skilled and talented employees, they are more attracted to industrialized regions. In particular, regionalization influences a country's trade volume, pattern, and welfare. When companies get necessary resources from within, their production cost lowers. In that light, they produce high-quality products and sell them at a reduced price, making them likely to maximize their profit margins.
Pauline Lectard and Eric Rougier ask a significant question of whether developing nations can benefit by defying comparative advantage. Export sophistication and diversification have proved to be significant factors for productive transformation in developing economies (Lectard & Rougier, 2018). The above two elements emanate from joint dynamics of comparative advantage and capital accumulation in factor markets and competitive goods based on the standard trade theory. At this juncture, the authors focus on developing countries in the same economic bloc. They suggest that these countries should implement policies that defy comparative advantage to foster the diversification of exports and productive transformation. The economic policy second-best theory argues that market incentives and price equalization can ...