Age of Globalization: Comparative Advantage and Economies of Scale

Coursework – Age of Globalization
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October 2, 2020
Comparative advantage
Definition: Comparative advantage is an aspect of globalization and a process in economics where nations specialize in products and services they are in an excellent position to provide.
Quote: "Comparative advantage [is] the process of countries using trade to buy cheaply the products it would be more expensive for them to produce, while at the same time specializing in the products they produce most efficiently." (Reed, 2020)
Comparative advantage is significant because it helps explain how countries relate to each other economically, through each country's providing of products and services, and which products or services are needed by each one.
Examples:China, for example, has an advantage in the electronics industry due to its abundance of labour. At the end of the last decade, China's electronics industry accounted for 10 per cent of its gross domestic product (GDP) and about 35% of its foreign trade. (Bhaumik, Driffield, & Zhou, 2016)
India is also another example of a country which has a specific advantage in a particular industry. Its information technology (IT) and customer service firms have access to a large pool of relatively inexpensive labour outsourced globally. (Bhaumik, Driffield, & Zhou, 2016)
Connection:Comparative advantage is intrinsically linked with globalization. As globalization has been defined as the interconnection of national economies across the world on issues such as the flow of goods, people, services, labour, trade, and investment, (Reed, 2020) the process of comparative advantage arises when certain countries have better accessibility to a pool of resources of industry and capital. Their better access means they are placed in a much more advantageous position to provide these services to the international market at large.
Economies of scale
Definition: Economies of scale is an economic term for the competitive advantage of large entities over smaller entities, where larger entities may reduce indirect costs by increasing its units of production, such production being accompanied with fixed direct costs.
Quote: "Economies of scale is a term used in economics that describes the advantage of large entities over smaller entities. These are cost reductions that occur when companies increase production. The fixed costs, like administration, are spread over more units of production. Sometimes the company can negotiate to lower its variable costs as well. Governments, non-profits, and even individuals can also benefit from economies of scale. It occurs whenever an entity produces more, becomes more efficient, and lowers costs as a result." (Amadeo, 2020).
Examples:An example of economies of scale in action is the production of tap water. In order to produce tap water, water companies have to install multiple fittings of source pipes and filter systems, often stretching to the length of a whole country. The cost of production is absurdly high but is offset by the market's demand. Were another company choose to compete against this much larger entity, it would inevitably become bankrupt due to the exorbitant costs which are not of...