A small nation’s comparative advantage: The case of Latvia

Problem of comparative advantage in international trade is important in theoretical and practical aspect. Theoretical models in this area are periodically re-examined in search for empirical evidence. The aim of the paper is to verify the two fundamental theories in the case of a small European country - Latvia - and disclose problems in the country’s trade specialization. In Latvia’s trade with “old” EU countries, the Ricardian model and the Heckscher-Ohlin theorem can be corroborated. After 2000, however, share of EU-15 countries in Latvia’s exports steadily declines. Instead, share of regional (Baltic) market increases, while the potential of CIS markets remains underexploited. Problem of identifying new areas of comparative advantage has become especially acute for Latvia. Latvia still can be considered a country with educated and easily teachable labour. Threat to this advantage is caused now by labour emigration and by situation in the country’s science and educational system. Research is based upon application of traditional theory, analysis of official editions, comparison of statistical data, and author’s own calculations.