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A world of whose making - Economic Interdependence and Political Order - Essay Example

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In the recent years, there has been an increase in the number of multinational businesses. Many factors have contributed to this growth, one of which is the increasing realization of businesses that specialization can cause an increase in production efficiency…
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A world of whose making - Economic Interdependence and Political Order
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These advantages cannot be transferred from one economy to the other, and therefore countries aim to use the advantages they have for producing goods with relative competence. This provides an insight into the reasons for countries like Japan and U.S. to develop their technology with relative efficiencies. When countries produce a specific good with comparative efficiency, they may not focus on the production of other goods. As a result, they would have to trade their goods with other countries. This is the argument buttressed by the theory of comparative advantage (Madura 2008). The theory provides an insight into the dynamics of the international trade and helps to show how trade provides advantages to the trading parties (D'Anieri 2009). The theory of comparative advantage in economics refers to the concept of production of goods and services at a lesser cost than that produced by another country. The country has a margin of superiority in the goods produced; this pertains to the notion that the opportunity cost of the goods produced by one country is less than that in the other country. David Ricardo was the developer of the basic theory of comparative advantage. He was of the view that absolute advantage is a subset of the more general theory. After Ricardo, a number of theorists furthered and developed the theory of comparative advantage including Heckscher, Ohlin and Samuelson. The theory projected the facts that different countries have varying factor endowments of labor, land and capital input. Countries are going to prefer the production of those products which extensively use the factors of productions with the greatest endowment (Tutor2u 2011). This follows that if the countries gain advantage by specializing in these goods, there will be an increase in the total output and economic welfare. This holds credibility even when one nation may have an absolute advantage over the other country. One of the assumptions which constitute the theory of comparative advantage is that there is perfect occupational mobility of the factors of production. This means that the resources of one industry can be transferred to another without significant loss of efficiency. The theory also assumes that there should be constant returns to scale; a proportionate increase in the inputs leads to an equal increase in the outputs. There are no externalities surfacing from production and consumption. Also transportation costs are not taken into consideration. Increased returns are a product of specialization and the idea was put forward by Paul Romer and Paul Ormerod. If businesses take advantage from increasing returns to scale, the gains from the trade are more. There is no transport costs associated with comparative advantage. Costs do not vary and economies of scale are not present. There are two economies producing and trading homogenous goods. Moreover the trade carried out between the two countries is not impeded by trade barriers. Also the buyers and sellers have perfect knowledge and the buyers are able to trace down the cheapest goods available in the market (AC Mulligan n.d.). Comparative advantage is not a static concept; rather it keeps changing. Businesses may have had comparative advantage in a market in one product for years in a row. However the gains made during this period may suddenly be at stake as new competitors enter the market. The contribution of Ricardo in the basic theory of ...Download file to see next pagesRead More
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