Specialization has been firstly established by Adam Smith theory, the absolute advantage. It is a method of production where a business focuses on one limited scope of products or services in order to gain productive efficiency within the entire system of businesses. Many countries, for instance, specialize in producing the goods and services that are native to their part of the world. On the other hand, incomplete specialization still exists with the modern theory, a result of the pure theory of international trade based on two-factors, two-goods Heckscher-Ohlin models. There are factors that make the specialization imperfect in practice; such as, endogenous growth, transportation cost, immobility, and interdependency. In 1994, Klaus Walde Economic interdependence has become a main complex issue in recent times, often resulting in strong and uneven impacts among nations and within a given nation. Economic interdependence is a consequence of specialization. Whitman, cited by Baldwin, further expands and proposes that economic interdependence should also involve the degree of sensitivity of a country’s economic behavior to policies and development of countries outside its border. However, empirical evidence to support the latter definition is a lot harder to find, given its ambiguity. Even though specialization will give comparative advantage, which is the ability of a firm or individual to produce goods or services at a lower opportunity cost than other firms or individuals, economic interdependence will scare some countries to specialize in something and dependently import something else from the other countries. In conclusion, interdependence will contribute imperfect specialization in international trade. These factors are clearly represented the factors that cause incomplete specialization. There are so many researches supporting these factors as this essay has discussed. Furthermore, the example can be found recently between countries. However, the factors that contribute to imperfect specialization in international trade in this essay are only majorities. There are many minor factors that might not been found or they might be too complicated to proof. Some factors might relate to the other factors, which impossible to be extracted from each
The trend toward a more globalized market has become increasingly developed in the latter half of the 20th century. Emphasis on world trade has become a dominant figure in almost every Nation’s economy. Between 1970 and 2000 world trade has experienced an increase of almost 370 percent. Concurrently, world GDP increased by 150 percent. Trade is beneficial to Nations because it allows the creation of avenues that aid in efficient allocation of resources (Canas & Coronado). Countries can gain from trade when they specialize according to their comparative advantage. This is, when they create conditions where goods and services can be produced at a lower opportunity cost than in any other country. Along the same logic, countries can also make large profits by taking advantage of another countries comparative advantage.
...le for sale on the internet. In the case of Shea butter production, division of labor is a crucial factor. The Shea tree is indigenous to West Africa making myself and other persons that use the product reliant on the African workers to produce it. For any county to be fully self-sufficient, or to not trade with other countries, it would possibly be deprived of such items that can not be grown there. Therefore, specialization is a factor that keeps the trade cycle moving, one country creates a product and is able to trade it with others.
An industrialized nation’s low tariffs on primary commodities encourage the less developed nation to expand their operations in that sector. Industrialized nations have a high tariff on manufactured goods. Tariff reductions on raw materials add to the discrepancy between nominal and effective tariffs of the industrialized nation. This worsens the competitive position in the manufacturing and processing sectors and poses an entry barrier for the less developed nation discouraging diversification as they can’t compete in that commodity sector (115-116).
Terms of Trade change mainly due to economic growth and trade barriers. Economic growth is biased; export-biased growth is when growth “disproportionately
Krugman defines comparative advantage as “the view that countries trade to take advantage of their differences” (1987, p. 132). Comparative advantage theories assume constant returns to scale and perfect competition. Krugman writes that trade exists when countries differ from one another in goods they have to offer, technology, or factor endowments. Although there are multiple models explaining the cause of trade, each differs as to what factors are included to explain why trade takes place. Economist Ohlin and authors Burenstam-Linder and Vernon began introducing counter-points to comparative advantage as early as the late 1950’s, saying that formal models of comparative advantage did not take into account all factors affecting international trade. International specialization and trade caused by increasing returns, as well as economies of scale and techn...
The Linder hypothesis, for instance, asserts that demand is more significant than comparative advantage in trade, and nations with the same demand will be more likely to trade. For example, both of the United States and Japan are developed countries with considerable demands for cars as well as strong automotive industries. Both nations trade diverse brands of cars to each other, instead of dominating the industry of other country with comparative advantages. In the same way, New Trade Theory states that factor endowments variation can separately develop comparative advantages.
Few governments will argue that the exchange of goods and services across international borders is a bad thing. However, the degree to which an international trading system is open may come into contest with a state’s ability to protect its interests. Free trade is often portrayed in a good light, with focus placed on the material benefits. Theoretically, free trade enables a distribution of resources across state lines. A country’s workforce may become more productive as it specializes in products that it has a comparative advantage. Free trade minimizes the chance that a market will have a surplus of one product and not enough of another. Arguably, comparative specialization leads to efficiency and growth.
In some ways, the creation of the regional trading blocs is interpreted as obstacles to global trade and exchange of the international advantages. For example, the North American Free Trade Agreement (NAFTA) that includes the U.S., Canada, and Mexico is a regional trade agreement between these countries, which implies lower barrier and trade restrictions. The U.S. imports textiles and other goods from Mexico at a lower price than the local market, which is due to cheap labor and reduced tariffs. However, other Asian countries have a reputation of being the haven of cheap production such as China, which is even cheaper than Mexico. In this scenario, we notice that regional blocs could limit the opportunities that international trade could offer. Equally, the European Union is another example of regional blocs that gathers most of the European countries, such as, France, Germany, Italy and others. The European countries have special agreements in which each country could trade with one another at a lower tariffs and reduced restrictions. As a result, this could causes isolation from using the opportunities offered from the other regions of the world such as production cost, cheap labor, technology transfer, and production quality. Regional blocs reshape the world in terms of economic entities and geographic locations, which is contrary to the concept of global free trade adopted by the World
The difference in the political economy has often been a major impediment to the growth of international trade among nations. Inflation rates, consumer spending, wars, tariffs all affect international trade. “Trade also brings dislocation to those firms and industries that cannot cut it. Firms that face difficult adjustment because of more efficient foreign producers often lobby against trade. So do their workers. They often
Countries, in general, choose to produce a surplus of the product in which they specialize and trade it for a different surplus good of another country. It is only based on that that traders decide on whether they should export or import goods depending on comparative advantages. In this case of Sri Lanka and Kenya their opportunity cost is presented as follow: for 1000 bag of rice, 3000 bags of tea are produce therefore we can assume that the opportunity cost of 1 bag of tea is 1/3 bags of rice in Sri Lanka while in Kenya the opportunity cost is 1 bag of tea for 1 bag of rice. Based on that we can assert that Both counties can decide to trade with each other based on their specialization because Kenya’s opportunity cost is less than Sri Lanka’s opportunity cost of rice, therefore, Kenya has a comparative advantage in the production of rice while Sri Lanka has a comparative advantage in the production of
The global economy needs free trade. Countries need free trade. Trade with other countries occurs at some level in every country globally. There may be some indigenous tribes within some countries that can lay the claim that they are self-sufficient, however, there is not a single country that can say the same. Proponents of an open trading system contend that international trade results in higher levels of consumption and investment, lower prices of commodities, and a wider range of product choices for consumers (Carbaugh, 2009, p26). Free trade is necessary. How do countries decide what to import and what to export?
The theory of absolute advantage, suggests that a country should export those goods and services for which it is more productive than other countries, and import those goods and services for which other countries are more productive than it is (Mahoney, Trigg, Griffin, & Pustay, 1998).
Inter-industry trade is one-way trade of different goods while intra-industry trade is two-way exchanges of similar goods. Moreover, inter-industry trade is a trade of products in different industries. Intra-industry trade, on the other hand, is a trade of products in the same industry. According to Forstner and Balance (1990), theses intra- and inter-industry trade models are based on different theories, because inter-industry trade is based on the comparative advantage theory and factor endowment, but intra-industry trade is based on the principle of economies of scale and imperfect competition. Countries usually engage in inter-industry trade, for instance, the trade of footwear products produced in China with technological equipment produced from the United States. Inter-industry specialisation would increase real incomes within a nation, but intra-industry specialisation would bring down prices, this in turn higher real incomes, and particularly increase varieties of goods available for consumers (Grimwade,
The article examines some of the influential theories in the domain of international trade including hyperglobalisation and comparative advantage. The publisher was keen to demonstrate how the theories need to be embraced since hyperglobalisation promotes investments flows from partners pursuing such trading agreements. The trading partners can still reduce their operation cost such as transportation while still navigating the complexities of hyperglobalisation. The author also endeavored to demystify the terminology of comparative advantage by issuing examples and previous concerns reported on the subject. It has been hailed that the traders often traded as per their factor endowments by concentrating on spheres of their specialty. The author also hinted to the readers that the theory of comparative advantage is a major concept since it is the first theory that economics students are briefed on. Arguments in support of the theory reveals that countries that have this level of visibility stand to benefit massively once they specialize in areas of their specialty. He purp...
The Liberal trade theory is considered one of the most influential international trade theories to date and is implemented by most key states and international economic organizations. The liberal theory is based on the premise of a free market approach where there is to be minimal or no political interference from governments to ensure maximum growth and efficiency, this premise is said to be market-centric. This believe advocates that “what markets work best as mechanisms for allocating resources (both domestically and internationally) if state intervention in market processes is kept to a minimum” (Broome, 2014, s. 22) (Khorto, 2014:2)