UNIT III Marketing Coursework About International Trade (Coursework Sample)
- Explain David Ricardo's theory of comparative advantage. How does comparative advantage differ from absolute advantage? What is the relationship between comparative advantage and gains from trade?
Your response should be at least 500 words in length.
- Explain the theory of external economies and their resulting impact upon international imports and exports. What are some underlying assumptions behind this theory and why are these assumptions important in international trade?
Your response should be at least 200 words in length.
Proposed in the 19th century by David Ricardo, the law of comparative advantage proposes that a country can engage in one or more types of trade as long as they are making profit. Comparative advantage proposes that a country should not only be limited to producing what it has an absolute advantage but it should rather produce what it is best at, or even least worst at (William, 2013). This means that a country can excel in the production of more than one item as long as they have done a comparative analysis with another nation that produces the same goods.
Comparative advantage is quite different from absolute comparison in several fronts. On one side, absolute advantage states that a nation should only focus on what it is best at producing and then depend on other nations for the other types of goods. This means that a nation should not put much focus in areas where their strength does not lies but should rather get such goods from the nation that specializes in such items (William, 2013). This means that if Country A is bad at producing wheat and not bananas, nation A should allow Nation B to focus in the planting of Bananas and then get them from that nation. By so doing, both nations should benefit from such an arrangement as each would have something to export to the other nation. However, Ricardo’s comparative advantage theory uses a different thought process as it proposes that Nation A does not need to solely depend on Nation B for Bananas as long as it has a capacity to do such a production (Rothbard,2012). Another difference between absolute advantage and comparative advantage is in the quality of goods that a country produces. If for example Japan and China can both produce cars, but China can produce cars of a better quality at a faster rate, then China is said to have an absolute advantage in the automobile industry. A nation’s absolute advantage or disadvantage in a certain industry has an important role to play in the types of goods that the nation decides to produce (Rothbard,2012). This means than in such a circumstance, Japan would be better served to devote its resources and labor in a different product that it is competent instead of competing with the more effective China. However, Comparative Advantage as proposed by Ricardo points out that allowing absolute advant
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