Comparative advantage and competitiveness in a small, ‘open' economy

The neo-factor proportions theory suggests that the concordance between the endowment of human capital and the human capital intensity of the production process is an important determinant of the commodity composition of trade. Profit rates could be, in principle, influenced by the degree of openness of the economy. This could particularly be the case when the currency is overvalued because then profits are likely to be higher in ‘sheltered' sectors where trade is small than in industries whose trade is large. The Belgian carpet industry which was facing major problems during the second half of the 1970s managed to restructure the sector so remarkably that by the mid-1980s Belgium had emerged as the leading world exporter and the second biggest producer of carpets. The management correctly perceived that Belgium‘s comparative advantage lay mainly in tufted rather than woven carpets.