The rise of Indian software industry

Essay by senor79University, Master'sA-, June 2004

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The rise of Indian software industry

Question 1

To what extent the theory of Comparative advantage explain the rise of Indian software industry?


Theory of Comparative Advantage

David Ricardo has developed theory of Comparative Advantage. Which was later developed by Heckscher-Olin. They all argued that all countries have different factor endowments of labour, land and capital inputs. Therefore, Countries should be able to specialise in and export products that they can efficiently produce. Comparative advantage says that international trade happens when there are differences in the price of production. (Hill Charles W. 2002).

Ricardo particularly argued that, the gains of specialisation depend on comparative advantage. World production can always be increased if trade takes place between countries, which have different relative efficiencies in the production of any goods or services. If each concentrates on those commodities in which it is relatively more efficient, or relatively less inefficient, a gain is there for the taking.

(Hill Charles W. 2002).

Without comparative advantage, there is no reallocation of resources within countries that will increase total world production. (Hill Charles W. 2002).

Comparative Advantage of Indian software industry

The rise of India's software industry, in my opinion clearly explains major part of the theory of comparative advantage. On the first part according to the theory, India has been able to specialize in those goods (software) that it produces more efficiently and at the same time exports it to the countries were software is produced less efficiently. (E.g. US, Europe and Australia). From the viewpoint of the developed countries, (which outsource) are importing goods, which there produce less efficiently. Therefore, this theory mostly focuses on the development of the global economy, where every country can gain benefits in trade.

The Economic gain from trade

The theory of comparative advantage suggests that trade is...