New Trade Theory and Comparative Advantage Theory - Term Paper Example

New Trade Theory and Comparative Advantage Theory According to Carbaugh (2017), the theory of Comparative advantage focuses on specialization where the production of goods is in accordance with the resources of the nation. However, the controversy of the comparative advantage theory has resulted in its criticism by the new trade theory by Krugman. Krugman (2008) criticizes the comparative advantage theory by stating that countries need not to necessarily specialize and engage in business specifically to benefit from their differences. Rather, countries should make a trade because of the increasing returns that make them benefit from specialization. Krugman (2008) criticizes the principles of the comparative advantage theory which emphasize the difference between the forgone and the relative costs. He refutes the idea of production of goods based on the concepts of comparative advantage theory. Ciuriak et al (2015) affirm that the new trade theory defines the trade occurring between countries that are similar and trading relatively similar products. The differences in the two theories have brought about arbitrariness in the pattern of trade and specialization. The paper critically offers a comparison of the theory of comparative advantage by Carbaugh and critique of comparative advantage (new trade theory) by Krugman. It also examines the implication of the factor endowment theory in the case of trade between countries with different endowments. Finally, the paper assesses the aims of Saudi Vision 2030 in relation to factor endowment theory and new trade theory.  Comparison between the “comparative advantage and new trade theory” The theory of comparative advantage and new trade theory shares a similarity as both advocates for the same principle. For instance, they both relate that for a country to benefit from trade, it has to consider trading between opportunity cost ratios. Correspondingly, the two theories support production which minimizes on the resources used as inputs with the aim of maximizing the profit.  Contrastively, comparative advantage theory is an extension of absolute advantage trade theory thus relies upon the opportunity cost. With the consideration of the opportunity cost, Carbaugh (2017) states that the theory emphasizes giving up one good or service in order to make more of the other. However, comparative advantage theory does not explain why a country should specialize in the production of specific goods and services.   New trade theory on its own is likened to factor endowment theory though is expounds on some of the concepts of the comparative advantage theory. Within this realm, the new advantage theory expounds the concept of specialization by explaining why a country needs to specialize in specific goods and services. This is most important if all the factors needed by the country such as land, labor, and capital as enlisted by Ciuriak et al (2015) are available. Comparative advantage theory does not include all the factors of production but only considers labor as the only factor needed in productivity. On the other hand, new trade theory considers all the available factors since when effectively used they lead to the production of various products within a country. Moreover, the two theories differ in terms of the technology used in production. For comparative advantage theory, the technology used in production differs from one country to another. Therefore, the theory does not adequately explain the trade patterns due to the high variations existing among countries as expounded by Carbaugh (2017). On the other hand, new trade theory takes that the technology used in production as similar in all countries and this makes it easier to explain trade patterns across the countries. Those arguing for this theory links technology to economic globalization which is significant in understanding the location of various firms, people working in them and the requirement needed for the success. The existence of the Leontief paradox as stressed by Krugman (2008) expounds on the commonality shared by the description of the new trade theory.  Factor endowment theory and its implication in the case of trade between countries with different endowments The factor endowment theory affirms that the various resources such as labor and capital within the country should be used in the facilitation of free trade which results in highest income and output compared to when the resources would not facilitate the free trade.  The theory as discussed by Carbaugh (2017) allows every nation to achieve the highest level of production and consumption individually but combining all the available resources rather than using them separately. The theory implies that free trade is beneficial to the countries involved. Within the countries, it fosters innovation as it allows the application of the various skills owned by personnel. It also reduces international political and economic animosities by discouraging monopoly. Carbaugh (2017) explains that this is advantageous as people can settle in the production of a variety of products which can be used as different output thus increasing income in terms of trade. Conversely, free trade can at times harm a particular domestic industry including its workers and this is likely to block the importation of necessary products within a country. Aims of Saudi Vision 2030 in relation to factor endowment and new trade theory Saudi vision 2030 is a comprehensive plan geared towards changing the economic structure of Saudi Arabia. It is aimed at developing other sectors and industries to ensure that the economy is not only dependent on oil as a source of income but also on other sectors especially the private ones(Foley 2017). Among the targets set includes reducing public spending through efficient use of the available resources, creating an environment attractive for both local and foreign investors as well as increasing the participation and employment of the nationals of Saudi Arabia in the workforce. The aims of Saudi Vision 2030 are well understood in relation to the factor endowment theory. This model aims at predicting the patterns of trade between the two countries. The factor endowment theory as described by Carbaugh (2017) encourages trade based on the locally made products and agricultural goods within a country. It is effective in achieving the Saudi vision 2030 since it encourages trade of a variety of goods excluding the manufactured ones as the trade between them is influenced by domestic demand conditions. Additionally, the theory advocates for firms within the country where the manufactured goods will have a large domestic market. The change to various firms will ensure Saudi Arabia’s exports to other countries thus extending the production for the domestic market. The new trade theory enables the fulfillment of Saudi Vision 2030 aims specifically the one on reinforcing investment by increasing the firms and economic activities. The theory expounds on how a country with various patterns of trade and development policies is prevented from heavy reliance on foreign aids by using trade only for economic development. As affirmed by Ciuriak et al (2015), the theory encourages any nation or country to rely on the intensive abundant factors of production in order to satisfy domestic production and international markets which promotes economic growth.   For Saudi Arabia, there are many natural and human resources which can facilitate oil production and other products as cited by Foley (2017). The vision 2030 is thus easily achievable considering the fact that new trade theory support production of more than one resource with minimization of inputs for maximization of the output. References Carbaugh, Robert, J. (2017). International economics: Foundations of Modern Trade Theory; Comparative Advantage and Sources of Comparative Advantage. Ciuriak, D., Lapham, B., Wolfe, R., Collins‐Williams, T., & Curtis, J. (2015). Firms in International Trade: Trade Policy Implications of the New Trade Theory. Global Policy, 6(2), 130-140. Foley, S. (2017). When Oil Is Not Enough: Sino-Saudi Relations and Vision 2030. Asian Journal of Middle Eastern and Islamic Studies Vol, 11(1). Krugman, P. (2008). Nobel Prize speech. Retrieved from: https://www.nobelprize.org/mediaplayer/?id=1072&view=1 Read More