Sikka and Theory of Comparative Advantage

In  a recent article, Vishal Sikka, CTO of SAP, wrote:

“In 2006, I visited South Korea and my host took me and several guests to a nice mountainside retreat and restaurant for dinner. This place was not far from the border with North Korea, and I remember one of the people there saying that, if only they were trading with each other, these fences would not exist.”

This got me thinking. Trade, or business, is a fundamental need of humanity. It is serving a very basic aspect of the human condition. It is also a great pacifier.”

And this got me thinking about “The Theory of Comparative Advantage” which economists consider as perhaps the most important (and often, misunderstood) concept in International Trade.

According this theory,  trade between nations will lead to an expansion in total output and mutual gain for each trading partner when each country specializes in the production of goods it can produce at a relatively low cost and uses the proceeds to buy goods that it could produce only at a high cost.  It is comparative advantage that matters.  As long as there is some variation in the relative opportunity cost of goods across countries, each country will always have a comparative advantage in the production of some goods.

Below is data from Business Week (sorry, I don’t have the exact date of publication) that tries to quantify the cost of going against the “The Theory of Comparative Advantage” in different industries. For example, it cost’s US annually $826,104 to protect one job in the sugar industry. In contrast, based on census figures, the median salary for a a full-time worker in US is approx. $40,000.

Next time, your local politician talks about policies to protect an industry and save local jobs, think about “The Theory of Comparitive Advantage”.


2 responses to “Sikka and Theory of Comparative Advantage

  1. The table above is not the whole story. I know it has not gone quite this far, but let’s suppose the US finds it economically efficient to send nearly all manufacturing overseas. If the US found itself in a future crisis, as it did it before in WWII, it would not be able to respond this time around. The US (and any nation, really) has to maintain the seed of its future survival. Markets are never optimal. Markets don’t maintain optimality. There are always players, whether motivated by greed or politics, ready to usurp markets or power in some bid for conquest. Other players must maintain a defensive capability to restore balance when markets are overturned.

  2. Pingback: Re-visting “Theory of Comparative Advantage” | Beyond Headlines

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