Category: Mathematics and Economics

Comparative Advantage and Absolute Advantage

Measures of Economic Growth

            According to economists, there are different ways of measuring the growth of an economy. According to Baldwin and Borrelli (2008), Gross Domestic Product is the commonly used measurement tool used to measure the economic growth of a given country. Nevertheless, certain economists believe that GDP is not a fully reliable method of measuring the growth of an economy.

In certain countries and institutions, improvement of the living standards can also be used as a tool for measuring the economic growth (David, 2005). GDP and other metrics such as unemployment rates, living standards, and inflation rates can help in determining the actual economic growth. Additionally, factors such as spending versus productivity can also help in quantifying the level of economic growth.

Comparative advantage and Absolute Advantage

According to David (2005), absolute advantage is the difference in the productivity of various countries while the comparative advantage denotes the differences that are there in the opportunity cost. Ideally, using smaller inputs to produce a large quantity of produce is known as an absolute advantage while the ability to produce at lower opportunity cost is a comparative advantage.

Therefore, certain countries such as China and the US have the absolute and comparative advantage at some point (Baldwin & Borrelli, 2008). For instance, the US use fewer resources to produce a given product compared to other countries. However, countries like China have a comparative advantage when they produce specific products at relatively lower margins.

            Both absolute and comparative advantage are two main important factors for the international trade. These factors elaborate how different nations use the little resources that they have to produce given quantities of produce (Hansen, 2012). However, the advantage and the disadvantage of a country also depends on its choice of goods to produce.

For other countries, devoting resources and manpower to other countries limits competition. For example, the US would devote resources to the vehicle-producing Japan rather than compete with it. In which case, Japan would have the absolute advantage while the US has a comparative advantage.

China

            Studies have revealed that China is one of the countries that continue to enjoy the advantage of its resources and human resources (Seretis & Tsaliki, 2016). China has overtaken countries like Japan to become the second-largest manufacturer after the US. Ideally, the country enjoys low labor costs while producing most of its products (David, 2005).

For China, the human resource is still an absolute advantage over many nations. The vast labor supply attracts larger investments and companies in the region. Compared to places such as the US where the human resource is declining, China enjoys a bigger absolute advantage (McConnell, 1999).

GDP Growth Rate in China

            The Chinese economy has grown to 6.7% in 2016, which is by the expectations. The GDP growth in China has been successful hitting a high rate at 15.4% in 1993.

USA

            Unlike China whose production is labour-intensive, the US enjoys a comparative advantage by using its specialized labor resource. In as much as the labor resource in the US is abundant, the country’s main advantage is that its human resource is skilled. As such, the US can produce high-quality products using its rich and skilled human resource.

GDP Growth in the US

            The GDP in the US increased to 2.9% in the third quarter of 2016 1.4% higher than the last quarter. However, the increase is attributable to personal expenditure increases, the increase in exports, inventory investments as well as the increased federal government spending.

Saudi Arabia

            Unlike other countries such as China and the US, Saudi Arabia is a country that relies on a single vast natural resource. According to Hansen (2012), this country would be poor without the large oil reserve. However, the nation enjoys a natural comparative advantage over other countries. With its large oil reserve, the country can engage in a profitable international trade with other major countries. As such, Saudi Arabia continues to enjoy a wealth of natural resource that gives it the extreme comparative advantage.

GDP growth Saudi Arabia

Saudi Arabia GDP grows at a rate of 0.5%. The Trading Economics analysts, the rate will remain 0.5% at the end of this quarter. However, the long-term growth rate is projected to increase to 3.5%.

Democratic Republic of Congo (DRC)

            Likewise, DRC is another country that enjoys the vast amount of natural resources. This country has large scale diamonds and copper compared to other countries. With its large scale natural resources, this country enjoys an absolute advantage when it comes to trade. The GDP of DRC increased from $241.87 to $306.1 between 2009 and 2016. This, therefore, makes 2% of the global GDP.

Annual GDP Growth Rate

Unlike the increased GDP growth rates in most countries with absolute and comparative advantages, DRC remains one of the countries whose GDP is sluggish. The outraging political conflicts in DRC makes it hard for them to enjoy a stable economy. The growth rate in 2016 remains at 4.6%, which is low by 0.2% from the last rate.

Variance in Economies

            The GDP growth varies across countries of various continents. However, Ural (2007) maintains that there are four main factors that determine the variations. The main factors that lead to variations in the GDP growth across countries include differences in the workforce, physical capital, human capital and technology differences (Shelburne, 2016).

Workforce Differences across Countries

            The differences in workforce across countries affects the rate of GDP growth and the growth of the entire economy. Ideally, the differences depict the amount of labor that a given country has towards its production (Rnskov & Foss 2016). Countries like China have vast workforce I term of human resource. This helps them during production because they can get abundant labor as compared to other countries such as Saudi Arabia.

On the other side, the level of the workforce can also help a country in ensuring a large scale production. The abundant labor force is advantageous in production. As such, nations such as the US, China and India tend to have higher economic growth than the other countries.

Difference in Physical Capital across Countries

            Physical capital is a determinant of economic growth. The larger the physical capital of a country, the stronger the economy of that country. For example, the US has a capital stock of $30 trillion compared to smaller countries such as DRC and Saudi Arabia. Although China’s physical capital is also high, analysts believe that the US enjoys more efficiency in production due to a larger physical capital that the nation has (Hansen, 2012). Physical capital helps a country to fund its production efficiently without outsourcing for credits. This makes various nations different from one another.

Human Capital Differences

            Human capital refers to the value of the human resource that a country has. In most cases, developed countries have more valuable human resource than less developed countries. Grandke et al. (2015) reiterated that the value of human capital is measured by determining the level of education and level of skills that individuals of a given country possess. According to McConnell (1999), the level of education is correlated to the GDP growth.

Therefore, the differences in literacy levels in various countries lead to variations in the economic growth of different countries. For example, the US has high literacy levels than DRC and Saudi Arabia. Conversely, this affects the levels of expertise and skills that the human resource has in such countries. This difference explains why China and the US produce larger amounts of products that DRC and Saudi Arabia (Ural, 2007).

Technology Differences

Technology is fundamental in the production and growth of an economy. Rnskov and Foss (2016) opine that despite capital, human resource and workforce levels, the availability of technology also helps in determining the rate of production and consequently the economy. Through Research and Development, large firms can acquire knowledge and skills of producing various products (Shelburne, 2016).

To produce efficiently, individual countries must use the right technology. Nonetheless, the cost of employing the right technology in production can only be met by specific countries that have stronger and stable economies. For example, countries such as China and the US have the capacity to acquire the right technology for production. On the other hand, countries such as DRC lack the adequate capital to acquire the right technologies in production (Seretis & Tsaliki, 2016).

In most cases, countries such as Saudi Arabia and DRC will import technology from other countries such as China and the US. Technology increases efficiency. Thus, it determines the levels of output. The nature of the technology used by a particular company helps in achieving a high level of production (Rnskov & Foss, 2016).

Trade and the Strength of Economy

            Trade is one of the drivers of economic growth. International trade is attributable to economic development by reducing the levels of poverty while increasing the commercial opportunities for countries. Through trade, countries like China and Saudi Arabia have expanded their production rates. Additionally, trade increases the value of investments in various countries as they go up into the global value chain.

The international trade facilitates diversification of exports thus, helping countries to access fresh markets internationally. On the other side, trade ignites innovation through the exchange of technologies and expertise (Grandke et al. 2015). It is through trade that countries such as China and the US have the ability to create employment opportunities to their populations. Moreover, trade helps in stabilizing the relationships between various nations thus, creating peace and harmonious environments that facilitate development (Shelburne, 2016).

Lifecycle of Trade

            Trade life cycle comprises of the stages that the trade goes through. With the predicted outcomes and objectives at hand, trade life cycle is supposed to represent the forecasted events. Grandke et al. (2015), acknowledge that stages of a trade determine the progression of the trade from its inception throughout its progression. Different countries go through different stages of trade life cycle.

            To execute a trade, various processes and procedures must be followed. Ideally, the stages determine the success or failure of the trade. In most cases, the processes start with the execution of trade after the agreements have been made. In cases of international trade, Rnskov and Foss (2016) note that the stages of trade are determined by the progress made in previous stages (Shelburne, 2016). For instance, countries such as China and the US have established trade lifecycles compared to developing countries such as DRC. Based on a country’s resources, trade lifecycle can be efficient.

References

Baldwin, N., & Borrelli, S. A. (2008). Education and economic growth in the United States: Cross-national applications for an intra-national path analysis.Policy Sciences, 41(3), 183-204. doi:http://dx.doi.org/10.1007/s11077-008-9062-2

David, H. L. (2005). So many measures of trade openness and policy: Do any explain economic growth? (Order No. 3179497). Available from ABI/INFORM Collection. (305006923). Retrieved from http://search.proquest.com/docview/305006923?accountid=45049

Grandke, F., Singh, P., Heuven, H. M., De Haan, J. R., & Metzler, D. (2016). Advantages of Continuous Genotype Values over Genotype Classes for Gwas in Higher Polyploids: A Comparative Study in Hexaploid Chrysanthemum. Bmc Genomics, 171-9.

Hansen, T. J. (2012). The use of business tax incentives: An analysis of the economic performance of minnesota’s JOBZ (job opportunity building zones) program (Order No. 3503148). Available from ABI/INFORM Collection. (1009056994). Retrieved from http://search.proquest.com/docview/1009056994?accountid=45049

Mazurek, J. (2015). A Comparison of GDP Growth of European Countries during 2008-2012 from the Regional and Other Perspectives. Comparative Economic Research, 18(3), 5-18.

McConnell, I. E. (1999). Trade and the environment: Defining a role for the world trade organization (Order No. NQ41085). Available from ABI/INFORM Collection. (304561048). Retrieved from http://search.proquest.com/docview/304561048?accountid=45049

Ørnskov, C., & Foss, N. J. (2016). Institutions, Entrepreneurship, And Economic Growth: What Do We Know And What Do We Still Need To Know? Academy Of Management Perspectives, 30(3), 292-315.

Rnskov, C., & Foss, N. J. (2016). Institutions, Entrepreneurship, And Economic Growth: What Do We Know And What Do We Still Need To Know? Academy Of Management Perspectives, 30(3), 292-315. Doi:10.5465/Amp.2015.0135

Seretis, S. A., & Tsaliki, P. V. (2016). Absolute Advantage and International Trade. Review of Radical Political Economics, 48(3), 438-451

Shelburne, C. R. (2016). Long-Run Economic Growth: Stagnations, Explosions and the Middle Income Trap. Global Economy Journal, 16(3), 433-458.

Ural, B. P. (2007). Essays in international trade and development (Order No. 3281742). Available from ABI/INFORM Collection. (304767664). Retrieved from http://search.proquest.com/docview/304767664?accountid=45049

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