David Ricardo’s Comparative Advantage Theory: A Case Study Of Hungary And The United Kingdom

Discussion

The main purpose of this paper is to delve in to the dynamics of David Ricardo’s comparative advantage theory. In the book “On the Principles of Political Economy and Taxation”, Ricardo had analysed the international trade factors of the countries around the world and how the said factors influenced the political scenario and internal economic regulations of the countries (Dean etal. 2020). Comparative advantage was one of the main factors to alter trade between countries. The term is defined as, a country’s potential on the production of any good or service at a comparative lower expense than any of its trading allies. Opportunity cost is the deciding attribute of comparative advantage. According to this theory, nations of the world take part in trade to export the goods and services they have a comparative advantage and import the commodities they do not have the same (Hanson, Lind and Muendler 2015). This alliance is beneficial for all the countries engaging in trading with each other. While analysing international trade and marketing strategy of the nations, this alliance acts as a deciding factor. This paper focuses on the comparative advantages of Hungary and the United Kingdom. Hungary mainly enjoys the advantage in agriculture-based products; that is, in the primary sector. On the other hand, for UK the advantage is mostly in the heavy machinery and service industries. The upcoming segments discuss in detail the socio-political scenario of both the countries; the industry enjoying comparative advantages and reason of the said advantages; ways the countries can improve the existing the superiority of production; and lastly, how the trade condition of these two countries influence the Australian economy.

 As mentioned above, this study has taken into consideration Hungary and UK. Hungary is an Australian neighbouring nation with a complex structure of the economy. The economic index of this country is 57^th in the world ranking. The GDP of Hungary for the year 2021 was calculated to be $194.14 billion. Before the break out of Second World War, the nation heavily depended on agricultural sector. During 1948, a policy of industrialisation in the Soviet Union pattern completely altered the socio-economic structure of Hungary (SZANYI 2019). In the coming years, the industrial and service sectors gradually improved but the livelihood of people not so much as the wages and prices of commodities were kept low. However, although the agricultural involvement in Hungary’s economy was being declined by the secondary and tertiary sectors, as the country has climate and soil pretty rich for agricultural and animal productions, the citizens always had their food requirements covered.

The United Kingdom on the other hand is a first world country with a social and market-oriented structure. The rank of this country is fifth in the whole world with a contribution of more than three percent of global GDP. The globalisation has benefitted the UK economy and currently the service sector of the country has a contribution of 81% of GDP. Not only that, the financial and capital markets of UK are the leaders in the world (Nasir ad Du 2018). It is known to the world that, the industrial revolution escalated from the UK. Most importantly, after the major setback of the World War II with sheer dedication and development measures the country was able to emerge as an economic leader by the late 90’s.

Background of the Nations

The country is not well equipped with mineral resources like some other members of the European Union, still the economy is massively export based in the international market. As mentioned before, the country was previously a centralised one and after the World War II the economy transformed to a market based one. As a result, there was a spike in the improvement of the sustainability. Further, not only the agriculture sector but some other industries also enjoy comparative advantage in international trade. In recent times, the main exports of the country are as follows:

In the European region, no other nation has experienced a growth like Hungary in the primary sector. Data from the past five decades show that, nearly 700,000 extra employments were generated in the agricultural produce itself. Although, during the last phase of the twentieth century there was a downfall in this industry, parallelly the industrial and service sector filled up the gap of economic loss. However, it has always been said that Hungary is a self-sufficient country in terms of food production (Balazs, Pataki and Lazanyi 2016). Till the day the country not only produce the domestic requirements of agricultural commodities but also export numerous products like corn, potato, sugar beet, wine and most importantly poppy seeds. With almost 33,000 workers, Hungary also is involved in animal husbandry and produces a healthy number of commodities produced from these sectors.

The industry and service sectors are more developed in Hungary but as almost 4.5 million hectares land is used for primary sector, the country enjoys a main comparative advantage in agri based products. Moreover, improvement in industrial goods production and technological advancement helps in mass production of agricultural goods. As a result, almost 9% of Hungary’s export is of agricultural products (Al Jaafreh and Nagy 2020). Some other industries operating with comparative advantages are discussed further.

Other countries are very much keen in investing in the automobile sector of Hungary. Some of the companies belonging from this industry are – Mercedes-Benz, Suzuki, Audi and General Motors which have their production establishments in the country (Mohiuddin 2018). A total number of 100,000 employees are engaged in the automobile sector and the export share is almost 17%. Audi’s production unit there is the biggest in the entire European region; the Mercedes-Benz unit can produce approximately 100,000 finished products per year; the plant owned by Opel currently has a count of 500,000 engines production rate.

The historical and cultural richness of the European continent has attracted many travellers along the years. Among other countries, Hungary is also famous for its tourist attraction (BUJDOSO, GYURKO and BENKO 2019). This attraction has created over 150,000 jobs for the domestic people till now. Not only that, as tourism sector earns foreign revenue, special emphasis was given to the tourism promotion resulting in additional employment generation in media houses. Lake Balaton is one of the most travelled point of the region with an annual tourist count of almost one million. The capital Budapest attracts the highest number of people, approximately 3 million per year. Some specific view points of Budapest are the Buda castle, Andrassy Avenue and the river embarks. 

Hungary’s Exports and Comparative Advantage

(HCSO, 2021)

As mentioned before, UK has a comparative advantage in different services. Along with that other industrial produce also enjoys the perks of comparative advantage. The country does not have adequate supplies necessary for the primary sector production. The imports from other countries fill up this gap. Apart from services there are other industries which enjoy a fair share of export.

The United Kingdom is a mass exporter of different services. These services include, financial, information technology, business related professions, graphics, media and tourism. The total export of services from UK is nearly 12%. After the United States, UK is the largest service provider in the international market (IJtsma etal. 2018). Before the financial crisis of 2008 hit the world, the net export of different commodities from UK was experiencing a downfall. In a situation like this, the service sector was the one to keep the economy afloat. Where the goods export was 2.5%, the service export stood at 7% during the said period.

OPEC handles the majority of crude oil exports around the world. However, UK enjoys an advantage of exporting the same (Lorusso and Pieroni 2018). According to the national agencies, the export of crude oil has a chance of extremely massive return than any of the years in the past two decades. From the North Sea’s Forties oil field, UK gets the maximum supply of crude oil which is predicted to exceed one billion barrels annually.

The heads of global finance organisations have stated that the pharmaceutical industry in UK is a successful segment of export. Apart from UK, the North American and other European countries have major shares of pharma export in the global market. However, the net UK export stands at €26.3 billion along with an additional advantage of producing the items in lower opportunity cost. Due to the recent events of covid-19 pandemic, there is a spike in pharmaceutical demand (Javorcik 2020). In an era like this, the United Kingdom has certainly become one of the leaders in the international field again.

UK has a massive production of electronic equipment like computers, televisions, sound systems, machine tools and heavy machineries like engines, valves and pumps (Scott etal. 2019). Some leading organisations of this sector are – Perkins, JCB, Yamazaki Mazak and Goodwin.

Being a first world country, UK is bound of have comparative advantage in luxury goods. Just like that, the automobile industry in UK is a fast growing a smooth sailing one (Dhingra etal. 2018). 80% of the total produced cars get exported from UK. The main entities of this sector are Morgan McLaren and Caterham. Apart from this, some international establishments also have se up their production units in the domestic border of UK.

The total value of mechanical exports from UK is calculated to be €48.5 billion. The main reason of the export base of this industry is the domestic market is limited. As the country has a comparative advantage in these productions, UK focuses on enhancing the international export on this segment (Lea 2018).

UK’s Exports and Comparative Advantage

It has discussed previously that Hungary has a comparative advantage in agriculture although the segment experienced a decline in the post Second World War period. The main reason of this advantage is a massive section of Hungary’s land was farms, owned by the state. A joint culture of farming and animal husbandry prevailed in those regions and was operated by families. Furthermore, the population of Hungary was adequate enough for the massive amount of production (Pasztor etal. 2016). Later, when the ownerships were made private, operations became lacking and less sincere. However, as the resources are already available there and after the era of industrialisation, production in this sector became easier and more sustainable.

In the case of other products discussed above, which belong to either the industrial or tertiary sector, the advantageous situation is a new found one. After the Second World War as the new policies emerged in the Hungarian economy, the growth in these two sectors became more prominent. Government also invested specially in this sector for the future development expectations (Nagy etal. 2018). Day by day as the GDP contribution increased from these sectors, Foreign Direct Investments also found a way in the domestic economy of the country. Consequence to this additional investment benefits, the secondary sectors became more resourceful and the industries started to gain a comparative advantage in trading with the European Union.

The United Kingdom mainly enjoys comparative advantage on heavy machinery and service sector (Ezeani 2018). Industrialisation and higher level of educational development have enabled the citizens to gather expertise necessary for the operating dynamics in this sector. As every modern service require specific knowledge and capital resources, UK being a developed nation could easily cope up with the requirements. Moreover, according to economists, factor endowments help in large scale production and large-scale production results in comparative advantage. The reason behind this scenario is higher volume of production lowers per unit cost of production. This is called economies of scale (Wells 2016). Summing up, high investment, quality infrastructure, skilled workforce and huge market demand globally enables the country to have opportunity cost in the production of these goods and services.

To improve comparative advantage, the current cost scenarios need to be developed further. In other words, using lesser resources and producing higher quality products in larger quantity help to attain the up graded comparative advantage (Costinot, Donaldson and Smith 2016).

It has been discussed several times that Hungary enjoys naturally available resources necessary for the agricultural development. Further, the wine production of the country is showing promising numbers. Now, if the government direct the investment towards the industries like agriculture, wine, animal husbandry and meat production, it can achieve the production scenario of before the Second World War. Moreover, FDI in Hungary’s industrial and service sectors are already showing both interest and prediction for further future growth in the productions. Thus, FDIs need to get encouraged. Another attribute the government can focus on is to improve the education structure of the country. If more people get educated and gather necessary skills, they become eligible for the complex process in the part of production. This can help in increased manufacture of goods in which the nation has comparative advantages. It is practically impossible for countries to have comparative advantage in every product available in this planet. Thus, focusing on the specific products will be advantageous.

UK is a first world country, so it can be argued that there is possibly nothing the country can do further to improve its comparative advantage. This is not true in real world. After UK exited the European Union, things got a little bumpy along the way. However, this enabled a new path for Britain to export outside the EU. That is, larger market for international trade. Further, experts suggested that although UK exited the European alliance, it must hold on to the European Economic Area as in that region Britain still had the comparative advantage of producing industrial goods and services. Additionally, as the world market and underdeveloped countries are growing day by day, the demand for services is getting higher. Apart from UK, Germany and the USA have somewhat monopolised the heavy engineering goods production market. In a position like this, United Kingdom must focus on further investment in the service sector. Artificial Intelligence for example is currently a growing market. Not only the developed nations but third world countries of Asia are also creating a healthy number of employments in this said segment. Thus, AI is another trade section which improves the comparative advantage of UK as it already has all the necessary resources present. Lastly, as the market centre is shifting further east, a better supply chain management can increase the need for UK based products. As it has mentioned before, higher need means higher production which is basically how any country can improve the comparative advantages for goods and services.

Trade means exchange of goods and services between countries and investment means capital allocation for the production of commodities which are profitable (Cote, Estrin and Shapiro 2020). Now, these investments must be channelled to products on which each country has a comparative advantage, and then those advantageous products must be traded to attain a sustainable international market. Now, some reasons for this mechanism are mentioned below:

1. In case of Hungary:

Adequate availability of primary factors like land, soil, climate and agricultural means are attracting investors to come forward. Furthermore, the population of Hungary is 9.77 million (Statista 2021). With a factor of potential workforce this size, mass production and economies of scale attainment is possible. As a result, more commodities can be traded globally and investments will get higher in the future.

1. In case of UK:

Higher levels of technological and industrial factors and huge resource endowments are helping the nation to produce huge amount of commodities and in international trade (Di Novo, Fazio and Vermeulen 2020). Moreover, flexible policies of the government and impressive structure of education and skill development are working as the catalysts for improved scenarios of trade and investment. Lastly, a large market for the comparative advantageous products is fuelling the nation to attain a consistent supply chain for selling these products.

The Australian economy is ranked 13^th in the global index due to its market orientation and developed nature. The service sector is the leader of domestic market with a contribution of 62.7% in the GDP. Australia takes part in the international trade and foreign investment programs.  

(ABS 2021)

Trade with Hungary and UK and how those influence the Australian economy are discussed below.

1. Australia and Hungary:

Hungary exports a number of products to Australia including all the commodities it has comparative advantage in, plus pharmaceutical, nuclear, sports equipments, rubbers, glassware, artworks and others (Seccia, Santeramo and Nardone 2015). On the other hand, Australia exports telecom equipments, small industrial goods and medicaments. Further, Australia had invested nearly $599 million in the Hungarian economy in the year 2019, whereas the Hungarian Investment was only $42 million in the Australian market.

Among these investments, Australia has also built units of its domestic companies like QBE insurance, TFE and Clark hotels, ResMed technologies for medical industry and Nufarm technology in agricultural industry in the national border or Hungary. Thus, as the production scenario of Hungarian economy is improving, the international investment and Trade scenario for Australia is developing further.

1. Australia and UK:

Australia and UK have signed an agreement of free trade in the last quarter of 2021 to reduce the export cost of Australia in UK. The value of export is predicted to be $9.2 billion. Moreover, the domestic producers of Australia are getting a larger customer base in the British continent. People from Australia can easily seek job or education in UK without much restriction. Then, the British businesses can also open their units in the Australian region which in result can create more job opportunities and products with comparative advantages will be produced further in larger amount. Lastly, both the countries with their joint service sectors can get better access to the international market and attain economies of scale (Suder 2018).

Conclusion

Therefore, this paper concludes that, comparative advantage is an important factor in directing international trade and investment. The countries considered here are Hungary and UK who have comparative advantages in different products and service. The reasons for these advantages are necessary supply of the factors of production, domestic and foreign investments, technological advancements and feasible markets. Further improving the domestic policies and channelling investments towards the advantageous production can improve the economies and eventually international trade. Lastly, both the nations are trading partners of Australia and mutual business and agreements are helping all the countries to not only develop their domestic economy, but to also strengthen their position in the global market. 

References

ABS, 2021. International Trade in Goods and Services, Australia, November 2021. [online] Australian Bureau of Statistics. Available at: <https://www.abs.gov.au/statistics/economy/international-trade/international-trade-goods-and-services-australia/latest-release> [Accessed 31 January 2022].

Al Jaafreh, O. and Nagy, I., 2020. Evaluation of sustainable agriculture in Hungary. American-Eurasian Journal of Sustainable Agriculture, 14(2), pp.11-22.

Balázs, B., Pataki, G. and Lazányi, O., 2016. Prospects for the future: Community supported agriculture in Hungary. Futures, 83, pp.100-111.

BUJDOSÓ, Z., GYURKÓ, Á. and BENK?, B., 2019. Tourism Development in Hungary on the Example of the Northern Hungary Region. Folia Geographica, 61(2), p.86.

Costinot, A., Donaldson, D. and Smith, C., 2016. Evolving comparative advantage and the impact of climate change in agricultural markets: Evidence from 1.7 million fields around the world. Journal of Political Economy, 124(1), pp.205-248.

Côté, C., Estrin, S. and Shapiro, D., 2020. Expanding the international trade and investment policy agenda: The role of cities and services. Journal of International Business Policy, 3(3), pp.199-223.

Dean, E., Elardo, J., Green, M., Wilson, B. and Berger, S., 2020. Absolute and comparative advantage. Principles of Economics: Scarcity and Social Provisioning (2nd Ed.).

Dhingra, S., Ottaviano, G., Rappoport, V., Sampson, T. and Thomas, C., 2018. UK trade and FDI: A post?Brexit perspective. Papers in Regional Science, 97(1), pp.9-24.

Di Novo, S., Fazio, G. and Vermeulen, W., 2020. 12 facts about the UK’s international trade in creative goods and services. Creative Industries Policy and Evidence Centre. https://pec. ac. uk/research-reports/12-facts-about-the-uks-international-trade-in-creative-goods-and-services.

Ezeani, E., 2018. Comparative advantage in de-globalisation: Brexit, America First and Africa’s Continental Free Trade Area. Journal of international trade law and policy.

Hanson, G.H., Lind, N. and Muendler, M.A., 2015. The dynamics of comparative advantage (No. w21753). National bureau of economic research.

HCSO, 2021. Hungarian Central Statistical Office. [online] Ksh.hu. Available at: <https://www.ksh.hu/?lang=en> [Accessed 31 January 2022].

IJtsma, P., Levell, P., Los, B. and Timmer, M.P., 2018. The UK’s Participation in Global Value Chains and Its Implications for Post?Brexit Trade Policy. Fiscal Studies, 39(4), pp.651-683.

Javorcik, B., 2020. Global supply chains will not be the same in the post-COVID-19 world. COVID-19 and trade policy: Why turning inward won’t work, 111.

Lea, R., 2018. Commonwealth countries: future growth markets for UK exports. Arbuthnot Banking Group, 9.

Lorusso, M. and Pieroni, L., 2018. Causes and consequences of oil price shocks on the UK economy. Economic Modelling, 72, pp.223-236.

Mohiuddin, M., 2018. Comprehensive Economic and Trade Agreement (CETA): Opportunities of Business Collaboration between Canada and V4 (Czech, Hungary, Poland and Slovakia) Countries. Institute for Foreign Affairs and Trade.

Nagy, J., Oláh, J., Erdei, E., Máté, D. and Popp, J., 2018. The role and impact of Industry 4.0 and the internet of things on the business strategy of the value chain—the case of Hungary. Sustainability, 10(10), p.3491.

Nasir, M.A. and Du, M., 2018. Integration of financial markets in post global financial crises and implications for British financial sector: Analysis based on a panel VAR model. Journal of Quantitative Economics, 16(2), pp.363-388.

Pásztor, L., Waltner, I., Centeri, C., Belényesi, M. and Takács, K., 2016. Soil erosion of Hungary assessed by spatially explicit modelling. Journal of Maps, 12(sup1), pp.407-414.

Scott, K., Giesekam, J., Barrett, J. and Owen, A., 2019. Bridging the climate mitigation gap with economy?wide material productivity. Journal of Industrial Ecology, 23(4), pp.918-931.

Seccia, A., Santeramo, F.G. and Nardone, G., 2015. Trade competitiveness in table grapes: a global view. Outlook on AGRICULTURE, 44(2), pp.127-134.

Statista, 2021. Hungary – total population 2016-2026 | Statista. [online] Statista. Available at: <https://www.statista.com/statistics/332538/total-population-of-hungary/> [Accessed 26 January 2022].

Suder, G., 2018. The business case for a free trade agreement between the European Union and Australia. Australian Journal of International Affairs, 72(3), pp.272-286.

SZANYI, M., 2019. The Role of State Ownership in and after Hungary’s Transition to a Market Economy. Seeking the best master: State ownership in the varieties of capitalism, pp.213-236.

Wells, P., 2016. Economies of scale versus small is beautiful: A business model approach based on architecture, principles and components in the beer industry. Organization & Environment, 29(1), pp.36-52.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order