THE LAW OF COMPARATIVE ADVANTAGE AS A BASIS FOR UNDERSTANDING INTERNATIONAL TRADE Institution’s Name: Date: Abstract This paper analyzes the influence of comparative advantage law as a basis for international trade…
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In addition, comparative advantage as a basis for understanding international trade is limited by the distance between the trading partners thereby increasing the transaction cost. Introduction Since the law of comparative advantage was introduced by David Ricardo in 1817, it has been used as a basis for understanding international trade. The law explained that countries should concentrate in producing what they best and let others do what they do best. The law is based on the premises that different countries have varying endowment and therefore those countries less endowed on production of a certain good should buy from more endowed countries thereby leading to more gains in trade. Ricardo demonstrated this law by giving the example of cloth and wine production between Portugal and England. Portugal is highly endowed in the production of the two and therefore Portugal would have to export the two. On the other hand, England would have to import the two goods thereby failing to gain from trade. Given that comparative advantage is based on relative operation costs, doing some things is comparatively more beneficial than others ("Comparative advantage: Doing what you do best", 2011, p. 32). ...
82). Although comparative remains a critical determinant of trade, OECD countries are more similar economically and therefore trade based on comparative advantage may not find application in current international trade ("Comparative advantage: Doing what you do best", 2011, p. 32). Despite the economic similarities among OECD countries, there are some differences which can drive trade based on comparative advantage. Moreover, there are remarkable differences between OECD countries and non-OECD countries and between non-OECD. Consequently, applicability of the comparative advantage could be more pronounced in North to South trade and South-South trade rather than it is for the North to North trade ("Comparative advantage: Doing what you do best", 2011, p. 32). In addition to the only one factor of production proposed by Ricardo, productive of the country is influenced by physical capital, level of education and availability of credit. Heckscher-Ohlin contradicts the argument of Ricardo and argues that varied comparative advantage among countries emerges due to differences in the abundance of factors and the intensity with which the goods rely on those factors (Morrow, 2010, p. 139). This paper seeks to analyze seeks to analyze the application of Ricardo’s and Heckscher-Ohlin law of comparative advantage to influence international trade and assess the extent to which international trade is affected by comparative advantage. International trade and comparative advantage based on Ricardo’s and Heckscher-Ohlin trade theories Production levels world over demonstrate heterogeneity and specialization (Kamery, 2004, p. 115). For instance, US produces over 35 percent of total
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Maybe one man’s catch was better than another, or he had found a better way to preserve it, or cook or cure it. It was the real or perceived advantage that one man or village had over another that formed the basis of trade and exchange. To some extent, barter exists in some form in undiscovered territories across the globe even today.
The economic goal of the country, then, is to have an export surplus which will be a gain in terms of precious metals such as gold and silver. In a sentence, mercantilists believed that one nation can only benefit from trade at the expense of other nations, so that economic nationalism would involve government control of all economic activities such as import restrictions.
The General Agreement on Tariffs and Trade was created by the US and its allies after the Second World War. Its creation was an answer to the disruptions of trade that happened during the Great Depression and during World War II. The GATT was signed in 1948 and was considered as an after war opening of trade liberation in the World.
the business firms are able to enforce labourers to work under extremely poor working conditions, and paid minimal basic wages; as a result, these firms are able to export their products at extremely low prices (Corden & Vousden, 2001). Dumping can thus be defined as a process
(Mankiw, 2010) Another critical source of comparative advantage for US is in cereals wherein it has been able to produce cereals at relatively cheaper prices as compared to other countries.
Even in such a situation, both countries stand to benefit from trading with one another as long as their relative efficiencies are different. Gains from trade are the net benefits each country enjoys from bilateral trade.
This research will begin with the definition of a сomparative advantage as the ability of a country, a group, a person, a company, an institution to produce a particular good and/or service at a lower opportunity cost over another. Comparative advantage should not be confused with absolute advantage whereby a given country is able to produce more.