Comparative Advantage and Openness to Trade
COMPARATIVE ADVANTAGES AND OPENESS TO TRADE
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.
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.