Comparative Advantage and Openness to Trade

10 October 2016

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. Suppose there is two individual firm or country growing and picking two types of fruits apple and cherries. One firm or country (A) is more productive and effective at producing both fruits. Does this means country (A) should produce both fruits and sell both apples and cherries to country (B).

But the opportunity cost for growing apple is very high for country (A) as it particularly efficient at growing cherries. All the resources spend to growing apple is taken away from growing cherries. So country (A) can grow cherries at much lower opportunity cost which gives country (A) a comparative advantage at growing cherries. Country (B) can grow apples at lower opportunity cost than country (A) giving country (B) a comparative advantage at growing apples. So both countries are better of specialising in growing one fruit, country (A) growing more cherries and less of apple and country (B) growing more of apples and less of cherries.

Then the country can trade cherries for apple. By specialising in one particular fruit both country can increase number of units grown. Following comparative theory will bring more goods in the world market. (Sorin, B 2012) believe the principle of comparative advantages is ever more closely connected to countries. As international trading grows, countries productiveness is also increasing with the consumers and demands. With innovations in technology and infrastructure the industries are more efficient than ever and able to have access to bigger market than ever.

Obviously in the example above, country (A) will dominate other country with absolute advantage in both fruits. Which means countries would not be interested in trade and would be happy to produce both fruits in their own country. That means produce goods between countries is not maximised. Therefore an absolute advantage theory can lead to mercantilism behaviour. Although such a simple model may seem inconclusive to say that it creates universal benefits does not explain the pattern of international trade. Appleyard, 2010, 29-40 The classic theory does not offer a satisfactory explanation of why production condition differ between countries.

Never the less Ricardo’s principle of comparative advantage has certainly showed the benefits for countries to trade. But capability of a country to have comparative advantages can entirely depend on lot of factors. Climate and natural resources is foremost the major key to for a country to have. Availability of natural resources in the nation gives you great advantage. For example, Saudi Arabia has a comparative advantage in the production of oil and Australia has comparative advantage in production of natural gas and minerals (Hubbard, 2010, 582-604).

And both countries are capitalising on this advantage and boosting the economy of their country. However to take advantage of these natural resources depend on other factors such as availability of technology, labour capability, capital and such. So make use of countries productivity, efficiency and marketing power, there also needs to be investment, bigger market place and other initiatives for countries to trade. The political structure and government of the country plays the pivotal part on the economy of the country. The move to openness and free trade has escalated many arguments around the world.

Push to free trade creates both benefits and costs to the countries. (Page, W 2012, 8-9) The realities of global trade in the 21st century create both opportunities and disadvantages. And Australia faces the similar ordeal where it wants to reduce protection in agriculture industry and export by producing and growing on mass level. But on their hand Australia is protecting its car manufacturing industry by subsiding. Clearly Australia having high labour cost is one of the reasons for not having competitive price in the car manufacturing industry.

Australia has sustained growth in the economy through acceptance and push toward liberalization. Australian economy with comparative advantage in natural gas and natural minerals is greatly benefiting from openness to trade. The mining industry in Australia has been great beneficial to the economy as records shows the mining boom in the past decade has created employments from 78,400 in 2001 to around 210,000. But in perspective, Australia has population of more than 22 million. Australia has done exceptionally well in mining industry and of this transpire due to globalisation and the concept liberalization in trade.

But there is also a growing argument that growth in the mining industry has negative impact on other industry such as agriculture and tourism. So it can easily be seen globalisation is great for the economy but the greater openness to trade can also have negative impact, costing the economy. Modern ideology and transnational corporation has proved to push protectionism away (Boltho, A 1996, 247), although it has not completely erased. There are still evidence countries implementing number of policies and regulation in some industries to protect from foreign market.

The reason of such action is free trade have negative aspects that countries want to avoid. Through openness to trade also identifies the weakness in the economy of the country. It exposes local business, undeveloped and volatile industry to the international market. Free trade definitely brings great competition in the market and local business will have rivalry on international level. The local business will have to compete with quality and price of the international goods and products. This is one of the reasons for Australian retail, manufacturing business to struggle as it is impossible to compete with cheap imports.

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