Technological differences create a scope for profitable trade both within the countries having comparable levels of technology, and between those which have substantially different technological levels.
(i) Countries with Comparable Technological Levels:
Currently, a major portion of world trade takes place between countries which are capital- abundant, economically developed and rich. Most of their products are capital- intensive. Their comparative cost advantage overlaps several broad.
categories of items; and they tend to specialise in their sub-categories. Individual producers often aim at catering to the demand of buyers spread over several countries and belonging to specific income groups or having specific consumer tastes.
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This way, they are able to expand their market and reap the economies of scale. At the same time, the consumers have also the benefit of a wider choice. The net result is an expansion in intra-industry international trade.
(ii) Countries with Different Technological Levels:
In contrast to the above, this type of situation prevails when we think of trade transactions between capital-abundant and capital-deficient countries.
Here, international trade is more in “dissimilar commodities” than in “similar and differentiated” ones, that is, it is mainly of the inter-industry variety.
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Advanced countries tend to specialise in the production and export of capital-intensive products while developing countries tend to specialise in relatively labour-intensive products, and minerals, etc.
Generally, on account of more efficient technology, a technologically advanced country is able to produce some of its imports at lower absolute costs than what it pays for its imports.
However, as in the case of Ricardian framework, it finds it more profitable to allocate its productive resources to those items in which it enjoys comparatively greater advantage.
In contrast, several products of less developed countries (including minerals and certain other “nature-intensive items”) remain acceptable as inputs or as consumption items by the richer countries.
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However, the cost advantage of innovators on account of technological superiority cannot last forever. Over time, “new” technology becomes standardised and a matter of common knowledge.
These days, this process has gained strength since technology itself is being treated as a trade-item. It is sold and transferred to “imitators” including those in foreign countries by several means.
The upshot of the argument is that, with the passage of time, the earlier comparative advantage acquired through technological innovations peters out.
However, being a dynamic phenomenon, technological advancement feeds upon expensive research and development (R & D) activities which capital- abundant countries can afford more easily. Consequently, they keep acquiring fresh cost advantage through (R & D).