IB7012-2 Econwk 2
IB7012-2 Econwk 2 IB7012
Popular in Global Economic Environment
Popular in Economcs
This 9 page Class Notes was uploaded by JC11 on Friday April 8, 2016. The Class Notes belongs to IB7012 at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months taught by in Spring 2016. Since its upload, it has received 20 views. For similar materials see Global Economic Environment in Economcs at 1 MDSS-SGSLM-Langley AFB Advanced Education in General Dentistry 12 Months.
Reviews for IB7012-2 Econwk 2
I love that I can count on (JC for top notch notes! Especially around test time...
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 04/08/16
NORTHCENTRAL UNIVERSITY ASSIGNMENT COVER SHEET Student: Jill Charpia THIS FORM MUST BE COMPLETELY FILLED IN Follow these procedures: If requested by your instructor, please include an assignment cover sheet. This will become the first page of your assignment. In addition, your assignment header should include your last name, first initial, course code, dash, and assignment number. This should be left justified, with the page number right justified. For example: Save a copy of your assignments: You may need to resubmit an assignment at your instructor’s request. Make sure you save your files in accessible location. Academic integrity: All work submitted in each course must be your own original work. This includes all assignments, exams, term papers, and other projects required by your instructor. Knowingly submitting another person’s work as your own, without properly citing the source of the work, is considered plagiarism. This will result in an unsatisfactory grade for the work submitted or for the entire course. It may also result in academic dismissal from the University. IB70128 Richard Thompson, PhD Global Economic Environment Assignment 2 Faculty Use Only <Faculty comments here> <Faculty Name> 2 Introduction Comparative advantage theory focuses on the economic theories of trade, specifically focusing upon David Ricardo’s theory. David Ricardo’s theory dictates the nations should specialize in the production of good and services where they have a comparative advantage. His theory suggests that a nation can produce good services at a relatively lower cost than that of other nations and should serve as the nation providing the items globally. This concept allows each nation to produce their specialties and services as cheaply as possible and trade with the other nations to maximize the amount of products that can be acquired for the same amount of money. By utilizing this theory in day to day operations, each nation can focus on achieving their own specialties rather than wasting time and resources to provide the same product at a higher price and less efficiently. In addition to comparative advantage, competitive advantage will be discussed to provide a basic understanding of why individuals, businesses, and nations provide better products. An alternative discussion will also be provided on the limiting factors which affect trade such as the policies implemented which will provide insight as to the relationship between China and the U.S, the two chosen countries for analysis. Theory and Basis The theory and basis of comparative advantage in today’s global economy is developed based upon finding the most efficient ways to satisfy the needs of consumers. Comparative advantage is a concept that states that “…the citizens of each nation can gain by spending more of their time and resources doing those things in which they have a relative advantage. If a good or service can be obtained more economically through trade, it makes sense to trade for it instead of producing it domestically” (Carbaugh, 2013). As business owners and mangers, the focus 3 must be on the consumer’s decision making process (Kreckova, Odehnalova, & Reardon, 2012). Understanding the way consumers make decisions is vital to being able to develop a product that will start engage the producing entity in a healthy competition. There were several economists that provided the framework of the modern trade theory, inclusive of Adam Smith, David Ricardo, and John Stuart Mill. David Ricardo provided one of the oldest and highly referenced theories, comparative advantage. This basis of the theory is incorporated the following assumptions: “(a) the world consists of two nations, each using a single input to produce two commodities, (b) in each of those nations, labor is the only input, (c) labor can move freely among industries, but not between nations, (d) the level of technology is fixed for both nations, (e) costs do not vary with the level of production and are proportional to the amount of labor used (f) perfect competition prevails in all markets, (g) product quality does not vary among nations, implying that all units of each product are identical, (h) free trade occurs between nations; that is, no government barriers to trade exist, (i) transportation costs are zero, (j) firms make production decisions in an attempt to maximize profits, (k) there is no money illusion, and (l) trade is balanced, exports must pay for imports” (Carbaugh, 2013). A nation’s imports and exports are selected based upon not only the product, but the price of the goods, as well as how efficiently a product can be manufactured. In most cases an individual consumer will choose to buy a product if it’s of the same quality and is the least expensive. Ricardo’s theory suggested that the basis behind comparative advantage is purely cost and people will buy the item if it is the cheapest. If an individual, company, or nation can not only create a comparative advantage in the home market, the comparative advantage can develop a global comparative advantage. Once the entity has a comparative advantage 4 established, it can sell the products and services it specializes in versus the ones that are not as successful. By abiding by this theory, a nation can dedicate time and resources to developing products and services that are more beneficial rather than recreating the wheel and dumping resources into a less than effective and efficient endeavor (Deardorff, 2014). Competitive Advantage and its Application Competitive advantage is part of the comparative advantage strategy. It is a concept that pushes individuals, businesses, and nations to produce the best quality, comparable product for a better price. Competitive advantage creates an incentive that will push an entity to continuously improve the product, enhancing quality, capability, and cost (Carbaugh, 2013). Competition is healthy for markets both domestic and internationally. Without competition, there would be little incentive to make improvements to a product that already works. The old philosophy of, “if it ain’t broke, don’t fix it,” is in direct conflict with the concept of competition, and until there is an incentive to change, many will not do so. An example this concept can be readily seen in is, in product, clothes’ dryers. A significant majority of children in the U.S. will never understand is utilizing a clothesline to dry clothes. This was certainly a process that worked until someone developed a better and more efficient product by utilizing a machine. Once the product of a clothes’ dryer was developed and value could be seen, the need to make the product better was next on the list. Competition was then initiated and manufacturers consistently try to improve the quality of the dryer, how quickly it dries, and how many different cycles are included. Without competition and the need to develop a competitive advantage, today’s youth may just be picking up a pail of clothespins instead of an iPad after school. Comparative Advantage Analysis 5 One of the issues with Ricardo’s theory of comparative advantage is the inability to test the theory itself. While his theory is one of the oldest and most distinguished theories in economics, it may not always be practical to do so. In some cases, one may need to make untestable assumptions about how productive a nation would be at the activities it is currently, and deliberately, not doing. If a nation chooses to stay away from producing bamboo because it requires land, different machinery, and an understanding of different processes, how could measure the nation’s ability to raise bamboo and compare it to others? One has to assume that it would cost more to develop this capability and estimate the associated costs. By making assumptions of this nature, a nation may be limiting its potential before it begins (Costinot & Donaldson, 2012). Anther potential error in Ricardo’s theory is the level of distortion created as a nation acquires wealth (Jaimovich & Merella, 2015). As a nation builds wealth, the population begins to consume more of the produced goods. As wealth levels increase, goods are more desired, and the more desired a product becomes, the higher the probability the manufacturer will raise the standard of quality to meet the consumers’ increased demands. In addition, the pricing to develop products decreases due to the increased demand; which can create a comparative advantage amongst other nations. While this process is one that can take place over time, the initial issue of distortion is still a difficult area to analyze and the wealth is not yet realized. If a nation does not see the necessary gains in a given period of time, it may decrease production and a true comparative advantage is not able to be realized (Jaimovich & Merella, 2015). To acquire a further understanding comparative advantage, an analysis of two countries will be conducted. The two countries chosen are the U.S. and China. The reason these two countries are chosen is simply the amount of 6 controversy behind the significant level of imports from China into the United States. One of the issues with Ricardo’s principle of comparative advantage is that it states that international trade is solely due to international differences in the productivity of labor. Ricardo’s theory predicts that countries will tend to export those goods in which their labor productivity is relatively high. In the recent years, the imports that are coming from China are increasing extensively. China certainly has developed ways to produce goods cheaper than many nations. Child labor and sweat shops have been known ways that have allowed China’s GDP to increase significantly in the last 40 years (China GDP, 2016). China has become the largest exporter and the largest holder of foreign exchange reserves. As of 2013, China’s GDP equated to 9.24 trillion USD and continues to grow anywhere from 6.7% to 7.5% representing 16.7% of the world’s economy (China GDP, 2016). The U.S. has no real reason to submit to China and allow the Chinese to produce a majority of the goods in the U.S. The U.S. as a nation can produce the same type of goods and should continue to do so as not become reliant on other countries to produce those goods (Autor, Dorn, & Hanson, 2013). By eliminating manufacturing altogether, the output would decrease the world output causing a reduction in world production, causing an increase in the pricing of the product. By 2007, China’s imports to the U.S. accounted for 40% of overall U.S. imports in the categories of luggage, rubber and plastic footwear, games and toys, and diecut paperboard, and over 30% in 28 other industries (Autor, et al., 2013). Developing Policy 7 Policies that are being for developed to reduce the competitive advantage that other nations may achieve include international commodity agreements. The policies are essentially, restricting trade into a nation, and the agreements have been formed to stabilize the prices and revenues of producers of primary products. The purpose of the policies is to slow or significantly decrease competition from companies outside of the home nation. There are a number of other potential policies that are put in place that affect the level of trade that can counteract the philosophy of competitive advantage. While these policies reduce the amount of goods coming into the country, the end result may end up causing more harm by reducing the overall GDP growth rate (Carbaugh, 2013). To counteract the stunted growth rate, nations should consider is the importance of implementing an open economy that encourages foreign investment. By implementing policies that allow for an open economy’s existence, other emerging company’s have a chance at competing (Carbaugh, 2013). Overall, one can see that there certainly is a delicate line of promoting or limiting comparative and competitive advantage among nations. Conclusion Comparative and competitive advantage both have a place in the international marketplace. Competition is the key to developing new and improved products. By promoting competition, an individual, business, or nation will be incentivized to develop cheaper and better products. This week’s assignment specifically focused upon David Ricardo’s theory of comparative advantage. The comparative advantage suggests that a nation can produce good services at a relatively lower cost than that of other nations. By having not only a competitive but comparative advantage, a nation can increase GDP, increasing the nation’s overall levels of 8 wealth and further driving the economy. The balance between imports and exports needs to be carefully thought out to best utilize world’s resources and maintain a thriving economy. This concept was further discussed by taking a look at the relationship between U.S. and China. By reviewing the trade interactions between the two countries and increased understanding as to why this relationship is so valuable is able to be realized. 9 References Autor, D. H., Dorn, D., & Hanson, G. H. (2013). The China syndrome: Local labor market effects of import competition in the United States. American Economic Review, 103(6), 21212168. doi:10.1257/aer.103.6.2121 Carbaugh, R. (2013). International economics. (14th Ed.) Florence, KY: Southwestern China GDP (2016). Retrieved from http://www.tradingeconomics.com/china/gdp Costinot, A., & Donaldson, D. (2012). Ricardo's theory of comparative advantage: Old idea, new evidence. American Economic Review, 102(3), 453458. doi:10.1257/aer.102.3.453 Deardorff, A. V. (2014). Local comparative advantage: Trade costs and the pattern of trade. International Journal of Economic Theory, 10(1), 935. doi:10.1111/ijet.12025 Kreckova, Z., Odehnalova, J., & Reardon, J. (2012). Consumer ethnocentricity within the environment of economic crisis. Engineering Economics, 23(3), 271281 Jaimovich, E., & Merella, V. (2015). Love for quality, comparative advantage, and trade. Journal of International Economics, 97376391. doi:10.1016/j.jinteco.2015.06.004
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'