What is dynamic comparative advantage theories?

Answer 1

The ability of an agricultural system to compete without distorting government policies can be strengthened or eroded by changes in economic conditions. Dynamic comparative advantage refers to shifts in a system's competitiveness that occur over time because of changes in three categories of economic parameters-long-run world prices of tradable outputs and inputs, social opportunity costs of domestic factors of production (labor, capital, and land), and production technologies used in farming or marketing. Together, these three parameters determine social profitability and comparative advantage.

The appropriate world prices for measuring efficiency or comparative advantage are long-run equilibrium levels that approximate best guesses of expected future prices. If the country's decisions to buy or sell on world markets will not have any measurable effect on world price levels, those price levels can be considered exogenous and, once arrived at, can be taken as given for domestic agricultural systems. The world prices are the correct indicators of social valuation of tradable commodities even if a country's decisions to buy or sell internationally do affect the world price of a good. When a large country has market power, however, the analyst needs to take into account the impact of that country's trading decisions on world prices.

In the absence of knowledge of future prices, most analysts project constant long-run real prices rather than fluctuating prices. If new information results in changes in the constant price guess or in the projection of continually increasing or decreasing future prices, these changes can be incorporated easily into the PAM. Separate PAMs can be constructed for each year, and each can have different assumed world prices.

Costs of factor services in any country can be expected to change over time. But cyclical variations in the real wage and the real return to capital, associated with swings in macroeconomic policy, are not the primary focus of the PAM method. Instead, interest centers on long-run trends in the costs of labor, capital, and land. As economies grow, real wages typically rise, both in absolute terms and relative to real costs of capital and land. For agricultural systems, changes in the social opportunity costs of labor and of capital depend on changes in the national environment for investment and growth. Land rental rates are endogenous to agriculture but will be constrained by changes in world prices and in real wage and interest rates, because payments to land and other permanently fixed factors come out of profits. Analysis of projected comparative advantage therefore includes both the future pressures that changing real factor prices might exert on agricultural systems and the influences of likely world prices for tradable outputs and inputs. The results identify systems that can readily expand and those that will have to contract or change in order to survive.

Changes over time in factor and commodity prices can also influence agricultural technologies. Farmers and researchers innovate, often by finding new ways of using less of factors that are relatively expensive (usually labor) and more of other inputs. Successful technological change permits commodities to be produced with reduced costs of one or more inputs. Empirical analysis of intra-system change can be done with partial budgeting, a technique in which individual cost-saving or revenue-increasing changes can be analyzed within the PAM for the initial system.