Comparative Advantage in The United States of America
Abstract
This research paper will provide an analysis of the current situation of the United States’ economy from the perspective of the Theory of Comparative Advantage. The Theory will be thoroughly defined and applied to the modern day concept as well as to the geographic and economic standpoint of the U.S. to discover in what way the United States has a comparative advantage over other producing countries. By extension, this paper will also find where the U.S. should not produce more to maintain efficiency. In order to achieve this goal, the factors of production, exports, and imports of the United States will be evaluated along with the nations that are involved in these actions. After this research is concluded, review will be given on the information collected as well as how the United States may obtain more of, or maintain at the same, a comparative advantage.
Comparative Advantage
in The United States of America
The United States of America is one of the powerhouses of the global economy. As such it is a highly complex and interconnected member of the global marketplace. This economy is in constant flux and this necessitates that it is evaluated and analyzed repeatedly in order to gain understanding about it. This research paper will delve specifically into the Theory of Comparative Advantage and how it applies to the United States of America and the nations that they trade with. It will also look into the factors of production that influence the U.S. and how imports and exports reflect the weaknesses and strengths of the country.
Comparative Advantage
The Theory of Comparative Advantage was first theorized by David Ricardo in his book On the Principles of Political Economy and Taxation in 1817. Ricardo was intrigued by the earlier works of Adam Smith and his Wealth of Nations along with the principles of the Theory of Absolute Advantage, but found that this theory did not account fully for how nations should apply their resources most economically (Ricardo 1817). Today, the Theory of Comparative Advantage has been tested and put into use to achieve this goal of increasing efficiency in the global market. The modern day idea of Comparative Advantage is defined as the “concept in economics that a country should specialize in producing and exporting only those goods and services which it can produce more efficiently, at lower opportunity cost, than other goods and services, which it should import” (What is C.A.? 2017). To calculate this there is usually a comparison between two countries which helps find where one country can produce more efficiently than the other and, therefore, should produce rather than import and vice versa. For the purposes of this research a broader scope will be used than this, by comparing the United States to multiple nations at a time to find where comparative advantage exists.
Factors of Production
Before finding Comparative Advantage in comparison to others, the factors of production for the United States must be considered to determine where an advantage might exist. First, the United States has a large land mass which is bordered by two separate oceans giving it a geographic advantage. This allows the U.S. to have secure borders, efficient ports, and a large area for population growth and collection of raw materials. Secondly, the United States has a relative abundance of natural resources including: arable land, fresh water, and oil reserves. These qualities make collecting resources easier and cheaper. Third, the U.S. is one of the larger nations in the world giving it a huge market for goods and services as well as a high need and opportunity for labor. Additionally, the United States has a diverse population, but shares a language, laws, and business practices which gives its economy a remarkable range of variety but also a typically standard code of conduct (Wolak 2011).
Advantage Predictions. Using the aforementioned analysis of the factors of production, we can highlight and predict what products the United States should produce most efficiently, and therefore, might generate a comparative advantage. Due to the wealth of natural resources the U.S. has, it should have a comparative advantage at producing goods for consumption. These goods will be both nondurable and durable goods, such as, food and packaging which are intended to be used presently or in the near future. In addition, the United States has a large labor force and marketplace which helps in the making and selling of more sophisticated products. Due to this there could be an advantage in producing high operation cost goods and services such as computer technologies and medicine (Consumer Reports 2013).
United States’ Comparative Advantage
One method to determine where a country already has a Comparative Advantage is by looking at the products that that nation produces the most of and has the ability to export to other nations. David Ricardo originally used an example of England and Portugal both producing two goods, cloth and wine, to help illustrate the reasoning behind this concept. For this research the percentage of Global Domestic Product will be used to evaluate the weights of what the United States produces, and what it exports. Where the United States does not have a comparative advantage will be found by looking at the goods it imports from other nations, which is calculated as a negative percentage of GDP.
Production and Exports
According to the CIA’s World Factbook, 76.3% of the United States’ Global Domestic Product is used for producing consumption goods, including both household and governmental consumption (CIA WF 2017). This confirms the prediction that much of the United States’ comparative advantage comes from producing durable and nondurable goods for consumption like auto parts and food for example. According to the Observatory of Economic Complexity, the United States’ primary exports are: oil, cars and aerospace parts, and medicine or pharmaceuticals (OEC 2017). This accounts for another 12% of GDP. This also confirms the predictions made about the United States’ efficient application of natural resources like oil as well as its production of advanced goods such as aerospace materials and medicines. These both require intensive labor and a high demand in the marketplace to be profitable. So, it could be said that the United States has a comparative advantage in producing consumption goods and cars, oil, aerospace parts and pharmaceuticals. Figure 1 below illustrates how these make up the GDP.
Imports
Using the same method as before, but in reverse with the imports found in calculating GDP, it is possible to find where the United States has a disadvantage in producing efficiently in comparison to other nations. This is where the United States might have a comparative disadvantage and should therefore not produce those goods or services. According to the Observatory of Economic Complexity, the United States’ primary imports are: Oil, Cars and Vehicle Parts, and Computers (OEC 2017). These first two results are surprising given what has been found about the United States production and exports and will require further analysis.
Conflicting Production, Exports, and Imports
While the United States does have a comparative advantage over most nations in oil production due to its high reserves of the resource and high consumption, we do not however have advantage over every other nation. The United States’ need for oil, whether it be gasoline or raw petroleum, is so great that it cannot produce enough to fulfill its own needs fully or efficiently. Therefore, nations such as Saudi Arabia who produce and export huge amounts of oil, have a comparative advantage over the U.S. in that aspect, whereas most other nations do not have this advantage. The United States does, however, have the largest oil reserves in the world (World Atlas 2015). Perhaps in the future, with more applied funding and labor to this resource, the United States could gain even more of a comparative advantage in the world of oil, and become more efficient than Middle Eastern nations.
There is also a similar issue with the export and import of cars. While historically the United States has been a huge manufacturer of cars and related equipment it has lost a lot of its market share in this area with countries like Japan and Germany. Additionally, the U.S. has the most cars of any country in the entire world. This large market creates a need that the U.S. cannot fulfill by itself.
Import Analysis
It is also important to consider where the imported goods come from. Locating where a comparative disadvantage comes from is key to discovering how it should be treated from an economic perspective. The top three countries that the United States imports from are China, Canada, and Mexico in that order (OEC 2017). Canada and Mexico both share borders with the U.S. so it makes sense that they would trade largely with them. Whereas, China is the United States’ largest competitor and trade partner in the global marketplace. Figure 2 below gives a visual representation of where imports derive from according to each state in the United States (Kiersz 2015).
Research Limitations
The research analysis in this paper has come from a wide perspective of the issues of comparative advantage. For more effective research into the specifics of comparative advantage on the micro and macroeconomics of the United States would require a tighter view of focus. For example, an economist might look at the specific comparative advantages of trade between the U.S. and Mexico for a certain range of products such as cars and textiles. In addition, there are more numerically sound ways of calculating comparative advantage than a simple juxtaposition of GDP. Graphing the aforementioned situation would show where opportunity cost is minimalized and where it is greatest.
Outcomes & Conclusion
This research shows us that the United States is better at producing consumption goods for its own use and outsourcing other tasks, such as the production of fuel, to where the price of labor is lower. Additionally, some of the United States’ comparative advantage is based on aging technologies like cars. The U.S. should pour more of its efforts into aerospace, for example, to maintain a healthy level of advantage over other nations and to continue technological advancement to increase efficiency.
While the United States has advantages in areas like size of labor force and raw materials and resources, it still imports a lot more goods than it exports. These imports amount to up to -14 percent of GDP (CIA WF 2017). In order to improve the U.S. economy, it should strive to make the use of these advantages a less expensive and more efficient alternative than importing. This will give the United States a comparative advantage in a wider range of fields. However, if there is a nation that is highly more efficient at producing a certain good then importing it is a necessity in order to reduce costs and maintain an efficient marketplace.
To sum up our findings, the United States, from a global and less specific vantage point, has a comparative advantage over most other countries in producing: Consumption Goods (for the country’s own use as well as others), Medications, and Aerospace Materials. Oil and automobiles and parts, as well as computers, may be areas where the United States does not have a comparative advantage and should import, at least for the meantime.
References
Consumer Reports Magazine. Products Made in America. (February 2013). Retrieved February 11, 2017, from http://www.consumerreports.org/cro/magazine/2013/02/made-in-america/index.htm
Kiersz, A. (2015, July 27). Here’s each US state’s most important international trading partner. Retrieved February 25, 2017, from http://www.businessinsider.com/state-and-country-trade-maps-2015-7
Maidment, F. H. (2013). Annual editions: International Business (17th ed.). Boston: McGraw-Hill.
McDonald, B. (2012, March 28). International Trade: Commerce among Nations. Retrieved February 13, 2017, from http://www.imf.org/external/pubs/ft/fandd/basics/trade.htm
The Observatory of Economic Complexity. United States. (n.d.). Retrieved February 11, 2017, from http://atlas.media.mit.edu/en/profile/country/usa/
Ricardo, David. On the Principles of Political Economy and Taxation. (April 19 1817). London: John Murray.
What Is Comparative Advantage? Definition and Meaning. (n.d.). Retrieved February 11, 2017, from http://www.businessdictionary.com/definition/comparative-advantage.html
Wolak, F. A. (2011, January 19). Our Comparative Advantage. Retrieved February 13, 2017, from http://www.nytimes.com/roomfordebate/2011/01/18/can-the-us-compete-with-china-on-green-tech/our-comparative-advantage
World Atlas. (2015, October 16). The World’s Largest Oil Reserves by Country. Retrieved February 25, 2017, from http://www.worldatlas.com/articles/the-world-s-largest-oil-reserves-by-country.html
World Factbook: UNITED STATES. (2017, January 12). Retrieved February 25, 2017, from https://www.cia.gov/library/publications/the-world-factbook/geos/us.html
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