Comparative Advantage and Openness to Trade

Topics: International trade, Mercantilism, Comparative advantage Pages: 7 (2333 words) Published: April 14, 2013
This paper will focus on the theory of comparative advantage and how it can be related to modern ideology and other trade theory. The world economy is moving with the concept of liberalisation bring substantial growth to economy along with scrutiny from those hampered by free trade. Australian economy also thrives on international trade but does not necessarily mean openness to trade has only positive impacts. This will also focus on the costs and benefits of free trade and how it has affected on Australian economy. The openness to trade is the key for economy of country to successfully grow along with the world’s economy. Globalisation is driven by new ideology, concepts and theories creating positive impact on efficiency through innovation, invention in technology and mass production. In modern globalised economy the theory of comparative advantage introduced by David Ricardo can be relative but needs to consider all other factors and concept. Comparative advantage theory suggests it is beneficial to trade and encourages countries to trade between each other. Even though one country is more efficient at producing all goods than other country trade can be beneficial for both countries. (Hill, 2011, 61-88) has described comparative advantage as ‘the theory that countries should specialise in the production of goods and services they can produce relatively more efficiently’. This may seem irrelevant today as the theory is based on number of unrealistic assumptions. This theory ignores the fact that each country does not have a fixed endowment of resources. In any process of producing and manufacturing goods and products there is an opportunity cost involved. Hubbard, 2010, 582-604 explains that the ability of an individual, firm or country to produce a good or service at a lower opportunity cost than other producers or manufacturers gives them comparative advantage. There is also an example tied to this explanation. Suppose there is two individual firm or country growing and picking two types of fruits apple and cherries. One firm or country (A) is more productive and effective at producing both fruits. Does this means country (A) should produce both fruits and sell both apples and cherries to country (B). But the opportunity cost for growing apple is very high for country (A) as it particularly efficient at growing cherries. All the resources spend to growing apple is taken away from growing cherries. So country (A) can grow cherries at much lower opportunity cost which gives country (A) a comparative advantage at growing cherries. Country (B) can grow apples at lower opportunity cost than country (A) giving country (B) a comparative advantage at growing apples. So both countries are better of specialising in growing one fruit, country (A) growing more cherries and less of apple and country (B) growing more of apples and less of cherries. Then the country can trade cherries for apple. By specialising in one particular fruit both country can increase number of units grown. Following comparative theory will bring more goods in the world market. (Sorin, B 2012) believe the principle of comparative advantages is ever more closely connected to countries. As international trading grows, countries productiveness is also increasing with the consumers and demands. With innovations in technology and infrastructure the industries are more efficient than ever and able to have access to bigger market than ever.

Obviously in the example above, country (A) will dominate other country with absolute advantage in both fruits. Which means countries would not be interested in trade and would be happy to produce both fruits in their own country. That means produce goods between countries is not maximised. Therefore an absolute advantage theory can lead to mercantilism behaviour. Although such a simple model may seem inconclusive to say that it creates universal benefits does not explain the...
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