2.1.2 Specialization through Trade

Academic Research paper and Study of the Economy of Romania and Romanian Business

Trade allows countries to specialize according to their comparative advantages, which can be either ressources or technologies. Several models deal today with specialization trhough trade, but everything started with David Ricardo who introduced the notion of comparative advantages.

Comparative Advantages – David Ricardo

By assuming productivity differences among nations, Ricardo showed that specialization and trade can yield a higher level of consumption for all trading partners. This level would be im­possible to achieve in autarky, as every trading partner owns different technologies, featuring other levels of productivity. Thus, every country should specialize on goods for which its economy features a higher productivity relative to other economies. In other words countries should specialize according to their lower opportunity costs. Ricardo called these comparative advantages.[1] This specialization will result eventually in an augmented quantity of goods, which can be redistributed via exports among the trading countries.

Heckscher Ohlin Model – Specialization according to Comparative Advantages

A somewhat more advanced theory of comparative advantages, specialization and trade is given by the Heckscher-Ohlin model. Here, productivity differences and comparative advan­tages arise not from different technologies but from a different factor endowment, hence, different factor prices.[2] Thus, trade in goods, based on the same technologies such as many industrial products can be proven as mutual beneficial. In the Heckscher-Ohlin world every country specializes on the export of products for which’s production it owns the factors in a relatively abundant quantity. Thereby, not only overall production and respectively consumption levels will increase. Furthermore, factor prices – in less technical terms: income levels and living standards – will converge indirectly via commodity prices. In this case trade in goods might serve as a substitute for a direct trade in factors.

Intra Industrial Trade and Comparative Advantages?

In the real world, though, such an equilibration of factor prices is rarly to be observed. Even if commodity prices tend to be balanced, factor prices often are not. Additionally, when it comes to European trade patterns a stunning proportion of intra-industrial trade (IIT) shows up. This seems to be an obvious contradiction to the dominating inter-industrial trade suggested by the theories based on comparative advantages. The classical models of international trade are challenged, not only as in the classical view “a country cannot both import and export the same product” (Robson 2000: 48) but as they completely fail to explain the phenomenon of IIT and its benefits. On the one hand, it shall be reminded that not all IIT is trade in final goods, thus representing horizontal specialization. To a considerable extent IIT represents patterns of vertical specialization and the respective trade in intermediate goods (cf. ibid: 48).

More Reasons for Trade

On the other hand, further considerations were also taken into account and identified in the 1980s. Especially the name Krugman has to be mentioned here (cf. ibid: 5). Overall, Markusen et al. (1995: 80f.) suggest five reasons for trade:

  1. Different technologies(Ricardo)
  2. Different (relative) factor endowments (Heckscher-Ohlin)
  3. Increasing returns to scale (economies of scale)
  4. Different tastes (demand patterns)
  5. Overcoming market distortions (such as imperfect competition)

A great deal of the latter three points new to our analysis can be shortly explained having a glance at the features of market sizes.


[1] In a broad sense a natural given, warm climate and the artificial climate in greenhouses can be interpreted as competing technologies. In this case a southern country would have a comparative advantage in the production of certain foods as their production requires less effort and input compared to a northern country, being depen­dent on costly greenhouses. General spoken, a technology in economics (often) denotes the ratio between a unit of out­put and its necessary input.

[2] Another reason for different factor prices is mentioned by Siebert (2000: 43). Different preferences and demand structures across countries can result in different factor prices even if the applied technologies and factor en­dowment are the same. Though the reasons for the differing factor prices may vary, the effects of trade will usually be the same as in the Heckscher-Ohlin case.