Trade Creation and Diversion

Topics: International trade, Mercantilism, Export Pages: 4 (1251 words) Published: December 12, 2012
Comparative advantage and exports in china
Comparative advantage by Paul Samuelson is the ability of a certain country to produce goods or services at a lower opportunity cost (the act of giving up something to obtain the better one) than the other. I chose this topic because it is the most important concept in international trade theory. Also is for the purpose of differentiating comparative advantage and absolute advantage in which most of the people fail to distinguish them. That absolute advantage is when both countries produce both goods at a lower cost and both countries get to gain in trade. What I want to analyze in this topic is that for example there are two commodities such as cheese and wine which are produced in home and foreign countries, their unit labor points are shown in the table below

| |cheese |wine | |Home |aLC=1 hour per pound |aLW=2 hours per gallon | |foreign |aLC*=6 hours per pound |aLW*=3 hours per gallon |

From the table, I obtain that aLC in terms aLW for home country is aLC/aLW‹Pc/pW‹aLC*/aLW* and for foreign country will be 1/2‹Pc/Pw/6/3, therefore both home and foreign gain from trade since that ½ will be for home country in producing cheese and 2 will be for foreign country in producing wine. More over china has no comparative advantage on producing high technology products so instead china has engaged itself mostly on the processing trade, that China imports the inputs from other countries and assemble them, and by doing this it helps china to develop job opportunities, high taxes and innovation capabilities. Not only that but also on how comparative advantage is measured that economists developed a mathematical equation known as the standard...
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