Preview

What Is the Theory of Comparative Advantage?

Good Essays
Open Document
Open Document
759 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
What Is the Theory of Comparative Advantage?
What is the theory of comparative advantage?
What is the theory of comparative advantage?
International trade began at long time ago and it influences our life and economic. The reason why people have motivation to trade to others countries are because: the theory of comparative advantage, the imperfect markets theory and the product cycle theory. The idea of comparative advantage has been first mentioned in Adam Smith’s and then it was studies deep and detail by David Ricardo. In his opinion, the foundation of the international trade is base on diversity of production technology and the diversity of the cost. For developing countries economic, people should concentrate to manufacture and export the goods which have own country’s advantage. However, they should import the produce which their country’s lack aspect. When a country specializes in some products, it may not produce other products or base on some country’s environment that lacks some natural energy. The theory of comparative advantage can make two countries get two win in the trade and can promote international trade.
Analysis the international trade between China and Angola under the theory of comparative advantage
Chinese economy current situation and relative advantage aspect
Chinese booming economy, which has averaged annual 9 percent growth for the last two decades, requires massive levels of energy to sustain its growth. Though China relies on coal for most of its energy needs, it is the second-largest consumer of oil in the world behind the United States. Once china is the largest oil exporter in Asia, but now it became a net importer of oil in 1993. The International Energy Agency projects China's net oil imports will jump to 13.1 million barrels per day by 2030 from 3.5 million barrels per day in 2006. China currently imports about half its oil supplies from the Middle East, and that percentage is projected to grow in coming decades. Yet the extent of the country's energy demand has also

You May Also Find These Documents Helpful

  • Better Essays

    International trade is based on having a comparative advantage. Countries produce products that are easier for them to produce, then other countries. A country having an advantage, can come from many different factors, availability, natural resources, relative efficiency of factors of production, and the state of technology. Each country offer a different set of advantages, like labor, land, capital, and entrepreneurship. If a country has a strong labor intensive work force, and has fertile soil, and a good climate suitable for growing, that country will excel, and have an advantage of producing agricultural goods.…

    • 1417 Words
    • 6 Pages
    Better Essays
  • Better Essays

    Addicted to Oil

    • 1208 Words
    • 5 Pages

    The United States’ increasing dependence on oil is a growing problem. Oil demand is increasing at an outstanding rate, not only in the U.S. but also around the world. Consider this, in 2008, “the world produced about 85 million barrels of oil a day, but global demand topped 86 million barrels a day” (Pickens). Just 4 years later the oil consumption rate has increased to 90 million barrels a day (IEA). A major portion of this increase can be attributed to high oil consumption rates in China and India, which now are importing more oil. The graph below from the Energy Information Administration (EIA) illustrates how significantly China’s dependence on world oil has increased over the past 15 years. It isn’t just competition for oil with other countries that is contributing to the problem though. Our usage of oil has to be looked at; especially our vehicles which consume an ever increasing amount of oil. According to the EIA, gas mileage of all types of U.S. made vehicles has leveled off since 1985. While foreign car companies have continued to make more fuel efficient vehicles, U.S. automakers have failed to keep up with innovations to make their vehicles increasingly more energy efficient. Based on the fact that each year more people are driving and people are commuting longer distances, oil consumption will continue to go up.…

    • 1208 Words
    • 5 Pages
    Better Essays
  • Good Essays

    In this I am going to assess the methods to increase trade between countries and the methods to restrict trade between countries. When asses the methods of encouraging and restricting trade I will talk about the purpose for the methods of promoting and restricting international trade, identify how and why they might be used and I will decide how useful each method is giving appropriate reasons for it. International trade is the exchange of goods and services between countries.…

    • 864 Words
    • 4 Pages
    Good Essays
  • Good Essays

    In the world market, countries trade products they wouldn't be able to produce on their own. Countries like Cuba specializes in cigar production, Japan in electronics, and Russia in rocket technology. However, even if a country has an absolute advantage in producing all goods, they still will benefit from trade. Many economic factors are involved with trade. Among the major factors are opportunity costs, comparative advantage, specialization and finally trade.…

    • 491 Words
    • 2 Pages
    Good Essays
  • Good Essays

    One of the reason countries trade with each other, is that they need to satisfy their own wants and needs, and that is, because they do not have the capacity, or resources to satisfy their wants and needs. Each country has a domestic resource that other countries need, and want. These countries take their domestic resource, and by developing and exploiting it, they can produce a surplus that then they can trade for the resources they do need. (March 2013)…

    • 379 Words
    • 2 Pages
    Good Essays
  • Powerful Essays

    For the last two centuries the international trade evolved a lot and many economists tried to explain it. One of the first theories that attempted to explain the international trade pattern was the Absolute advantage theory. A.Smith was a great economist; he is the one who created this theory. For A. Smith countries should specialize in products in which they have an absolute advantage. It was a good Theory but it was excluding countries that did not have any absolute advantage. David Ricardo another great British economist found this loophole in Smith’s theory and decided to make his own trade theory. Indeed according to Ricardo even if a country does not have an absolute advantage, it can still specialize in products in which it would have the less disadvantage to product relatively to another. So from Ricardo’s point of view any country would be able to specialize in something and then trade with other countries. In that case every country could enjoy the specialization and get some profit. However Ricardo also said that some requirements were needed for the comparative advantage theory:…

    • 1536 Words
    • 7 Pages
    Powerful Essays
  • Better Essays

    “In economics, the principle of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party…the advantage a nation has by being able to produce products or services more efficiently and at lower cost than a competitor nation… A situation in which a country, individual, company or region can produce a good at a lower opportunity cost than a…

    • 1733 Words
    • 7 Pages
    Better Essays
  • Powerful Essays

    Free Trade In Australia

    • 1155 Words
    • 5 Pages

    Place we trade is called a ‘market’. For example, a fruit and vegetable market trades goods such as an apple, etc. Or, trade can refer to a baker who trades money for flour or wheat. However, we do not tend to trade because of the needs of other goods and services that we can not produce. Also, trade helps with increase of GDP, employment, incomes, wider range of choices in products, living standards and decreases inflation. We tend to trade because of the benefits we all can share around that will eventually make both side of trading relationships to gain advantages. This is called the law of comparative advantage. This principle notes that a nation should ‘specialise’ in those select areas of production in which…

    • 1155 Words
    • 5 Pages
    Powerful Essays
  • Satisfactory Essays

    The fact is as a country controls a huge part or benefit to other countries, this gives them the information that a country is producing a product with fewer resources. A country producing more products, have more ability, and knowledge to produce these particular products. Bad results should be the big concern and not the obstruction for the countries to create or do trade arrangements.…

    • 358 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    Effects of Crude Oil Prices

    • 5103 Words
    • 21 Pages

    Crude oil is highly subject to speculation, but is also greatly affected by growing demand in developing countries. The most notable new mass consumer is China, with a population of over one billion people and a demand profile that is rapidly increasing to place a strain on oil supply in the world market. China has the capacity to require more oil supply than the rest of the world combined.…

    • 5103 Words
    • 21 Pages
    Powerful Essays
  • Powerful Essays

    H-O model

    • 1776 Words
    • 8 Pages

    Uncountable number of trades takes place all over the world every minute no matter in developed countries or the developing ones. The theoretical foundation of international trade is from classic economic theory that dates from the nineteenth century - the Ricardian Model. The model shows that a country’s production and trade pattern is determined by comparative advantage, which is based on the differences in the productivity of labour. In reality, there are more factors that require to be taken account of, like labour, land, capital etc. Due to the differences in factor proportions, trade can be generated between countries of all kinds. To explain this we can use the Heckscher-Ohlin Model.…

    • 1776 Words
    • 8 Pages
    Powerful Essays
  • Satisfactory Essays

    Potential essay topics

    • 286 Words
    • 1 Page

    16. China’s demand for raw materials (e.g., crude oil, natural gas) and its economic development…

    • 286 Words
    • 1 Page
    Satisfactory Essays
  • Satisfactory Essays

    According to the theory of comparative advantage, a country should specialize in the production of goods that it is good at producing, and buy the goods from another country that it is less efficient at producing. Therefore if country X can produce product A more efficiently than product B, while country Y can produce product B more efficiently than product A, then they should trade (even in the situation wherein country X has an absolute advantage over country Y in producing both product A and product B). Country X should sell country Y product A and buy product B from country Y. Both country will benefit from trade in this situation.…

    • 317 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    School Work

    • 643 Words
    • 3 Pages

    International Trade is important to many countries because it allows a country to import products or resources that may be difficult to produce locally. As a result, this enhances the country’s growth and economic wealth, and also allows the country to focus on increasing the production of resources or goods that the country can then export elsewhere. For…

    • 643 Words
    • 3 Pages
    Good Essays
  • Better Essays

    Global Cooperation

    • 1285 Words
    • 4 Pages

    Different countries’ economies are linked together, and influence one another in many ways. Hence, in the globalized economies people always worry more about the economic growth and crisis. Trade is the activity of exchanging goods and services. There are many trades, for example, to exchange fish for beef or to pay a taxi for its driving. One of the economic principles is that trade makes everyone better off. International trade is essential in these days because each country cannot provide the product it needs to serve the whole society, or it will cost more opportunity cost such as time and money in some productions. In this case, global trade is required. According to the World Trade Organization (WTO), 2013 annual exports valued $18,784,000 million in total merchandise, and valued $4,623,710 million in commercial services (2014). These massive amounts of numbers show the significant value of international trade in the world.…

    • 1285 Words
    • 4 Pages
    Better Essays