LMT LTE * 63% 15:28 estudijas.rtu.lv Comparative Advantage. High Value-Added. Qu

Question

LMT LTE * 63% 15:28 estudijas.rtu.lv Comparative Advantage. High Value-Added. Questions: 1. Please, explain the intuitive aspects of comparative advantage in the context of Latvia (what goods/services do you expect to have comparative advantage)! 2. Should high-value added activities also be the key exports of a certain country - why or why not? Do you find evidence in the data provided below? 3. For further discussion/calculations here are some links to Latvian data sources Value added, exports imports, employment Total value added (up to 2016: http://data.csb.gov.lv/pxweblenickfin/ckfin ikgad ikp/IK1 0 0060 px/2rxid a79839fe-11ba-4ecd-Scc3-4035692c5fe8 Employment: http://data.csb.govlv/pxweb/en/Sociala/Sociala ikgad aiz Exports and Imports by NACE classification (2009- 2016): btu datacsb.gov.lvpawebenaturdzatrdz_ikead-tird nace tablelist truc&rxid-a79839fe-11ba-4ecd-8cc3; 035692c5fe8

Explanation / Answer

Ans1

In international trade comparative advantage of countries play an important role. It speaks about specialization of countries in certain goods/services which can later be traded with other countries and thus both countries enjoy mutual benefits.

In the case of Latvia in present scenario the country is seeing that it is losing comparative advantage in certain goods in which it previously enjoyed healthy comparative advantage. Most prominent of these goods is wood products. Also Latvia is losing older markets for wood products (the EU-15) since about year 2000, but is still maintaining certain exports to neighboring Balkan countries. The share of wood products in Latvia’s export is falling from about 25% in 2006 to about 19% in 2011. Similarly exports as percentage of total exports have fallen in certain other traditional export goods of Latvia such as food products and metals.

Judging by old export pattern of Latvia, it can be said that Latvia has comparative advantage in products such as wood products, food products, metals, machinery, and chemical products (top 5 export items by Latvia over the years)

Therefore it is imperative for Latvia to find new products (goods and/or services) with comparative advantage and export potential. It should also look out for new markets where it can export its goods, as new markets will provide easy way to find comparative advantage.

However all is not gloomy with Latvian experience. The data shows Latvia has diversified its exporting products. The Herfindahl-Hirschman index of Latvian export concentration has fallen dramatically from above 0.5 in 2004 to below 0.2 in 2008. Since 2008 it is maintained at about 0.2. This shows product diversification in Latvian exports. Some new products which has emerged as important export items for Latvia are Steel, Vehicles, and Machinery.

Also data indicates that though some of the traditional markets for Latvian exports such as Germany declined, it has found new markets such as Lithuania, Estonia, Russia, Poland etc. where its exports have been increasing.

Both these data indicates that between Latvia has been successful in finding new products to exports to traditional markets and also in finding new markets to export both new and traditional products.

Latvia has thus achieved heterogeneity in export products as well as export markets. Some experts also believe that non-price competitiveness has also played a major role in Latvia’s success.

Latvia does enjoy a skilled labor force, but this advantage can be threatened by emigration in coming years.

Ans 2.

High value added activities as key export products offer certain advantages to the exporting country such as –

However there could be certain disadvantages also to have high value added products as key exports.

Nonetheless high value added products still needs to be a part of a country’s exports. In absence of such exports and reliance only on non-value added products a trading country may see secular deterioration in its terms of trade (as hypothesized by Prebisch-Singer) and thus its condition will worsen over time.

In the Latvian experience we can also see that it has been successful in diversifying its exports from low value added ( eg: wood products) to higher value added products (eg: machinery) and it has thus successfully averted itself from going into a very bad economic situation.

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