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Trade between Countries - Essay Example

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This work called "Trade between Countries" describes various reasons and theories behind trade between countries around the world. From this work, it is clear about various types of trade theories such as monopolistic competition, Heckersher-Ohlin, and comparative advantage…
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Download file to see previous pages Also known as Ricardo's theory, the comparative advantage theory can be broadly defined as the potential gains from international trade that arises from various differences n technological progress or factor endowments.  In 1817, David Ricardo developed this classical theory for explaining the reason for trading between different countries. As per this theory, comparative advantage is the key point of international trade between the two countries. As per this theory, international trade is primarily based on the differences in opportunity costs, for instance - technology difference (Maneschi, 1999). 
The comparative advantage of economic theory is one of the most important concepts in international trade. This is also one of the most misunderstood principles of economic theories. There are many points that can be misunderstood such as the results from the application of formal models are opposite of the simple logic (Suranovic, 2010). Further, it is very easy for the students to confuse the theory with another economic theory that is an absolute advantage. The third reason is the fact this theory is mostly presented only in mathematical form. Although it is easy to understand the basic results, most of the people do not understand the basic intuition of this economic theory (Suranovic, 2010). 
In 1817, in his book On the Principles of Political Economy and Taxation, David Ricardo offered a famous example to support his theory. There are two countries, England and Portugal who are capable of producing both cloth and wine. In Portugal, it is relatively easy to produce both cloth and wine at a low cost when compared with the cost in England (Ricardo, 2004). But in England, it is cheaper to produce cloth than wine. So, it is beneficial for both countries if England produces cloth and trade with Portugal for wine. Conversely, it is beneficial for Portugal to produce wine and trade it with England (Ricardo, 2004).
Every economic theory is based on some assumptions. The comparative advantage theory is based on these assumptions. The first assumption is that the world economy is based on 2 countries and 2 goods. This economic theory is the same for the actual larger number of countries. However, due to this assumption, the principles become clear and the arguments become easy to follow (Ricardo, 2004). ...Download file to see next pages Read More
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