Comparative Advantages, Poverty and Trade

Comparative Advantages, Poverty and Trade
Student’s Name
Institutional Affiliation
Comparative Advantages, Poverty and Trade
Literature review
In the inquiry of the cause of the wealth and poverty gaps between nations, Adam Smith gave us ideas on why some countries are rich while the others are poor. In more than 200 years after the Adam Smith publication of the book “wealth of nations,” the poverty gaps continue escalating between the wealthy and the developing nations in the globe. The original question asked by the economist Adam Smith “why some countries are poor and others are rich and what can be done about it” continues up to the present day to disturb the economists. In general, defining the richness or poverty is very simple. For us to compare the wealth of two or more different countries, we use the gross domestic product (GDP) and the per capita income (PI) as the economic indicators to measure the wealth and the wellbeing of a country. The GDP estimates the total value of the country's resources which has been produced by that country's citizens. In other words, the country's gross domestic product is the yearly income that belongs to that nation. The per capita income is the average income that is available to every individual in a country. The per capita income is the gross domestic product divided by the number of people in a country. It helps in determining the quality of life of people in a country.
The economic growth of a country is the sustained and gradual rise in the value of the goods and services produced by a nation. It helps to reduce the poverty gap between the nations. Many factors influence the country’s economic growth. Two of the strongest pillars of constant economic growth are strong institutions and trade (Olson & Mancur, 2016). Financial institutions provide capital and incentives to the producers. The producers are therefore motivated to produce more goods and services which can export to earn the foreign exchange income. The continuous increase in this income is what contributes to the country’s growth and development. Secondly, a nation has to be well conversant with international trade for it to prosper economically (Mutreja et al., 2014). Trade is a broad term since a country only produces and exports the product which it derives a comparative advantage. Comparative advantage is the advantage that a state has in making goods and services over another country. If it is cheaper to create products and deliver services to the state as compared to another, the comparative edge emerges in the cheap production and delivery.
Scholars have agreed that there is always a significant relationship production of goods, export, and economic growth. The relationship is that exportation of manufactured goods creates wealth to a nation and hence the economic growth and not the vice versa. There are empirical studies that support the position that product exports increase wealth for the government, which is so essential for economic growth (Frank et al., 2018). A country which puts more emphasis on exports helps to harness its resources to the most productive sector of the economy and hence the economic growth. The production efficiency further in...