Essay by George Kotselopoulos
Why do countries trade with each other? Show, using examples, why this may be to do with the principle of comparative advantage.
International trade is the barter of goods and services between nations. The reason of such exchanges is because each country has access to different forms of natural, human, and capital resources; as well as a different way to use them for production of goods and services. Therefore countries are not always able to supply the goods its consumers demand and have to resort to other countries to acquire them. By choosing to produce a good, a country chooses at the same time not to produce another, this is called opportunity cost. Goal of a country in order to be more efficient is to produce the good with the lowest opportunity cost and then trade for the good that would be unprofitable because of its high opportunity cost. Two countries can benefit from trade when they can both lower the opportunity cost of the goods they obtain through trade. A country has a comparative advantage if it can produce a good at a lower opportunity cost than another. Comparative advantage is a theory first encountered in an essay on external corn trade by economist Robert Torrens in 1815. In which he says that it would be profitable for England to trade with Poland, even though the item could be produced in Britain for a lower cost. The theory of comparative advantage was developed in depth by economist David Ricardo two years later in his book “On the principles of political economy taxation”. The concept was mentioned again by James Mill in “Elements of political Economy”. Finally the theory of comparative advantage was treated as a vital point of international economy with the publication of the book “Principles of political economy”. Although a core concept of international economy comparative advantage is often misunderstood with a similar theory, absolute advantage. This is because both concepts refer to the...
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