Essay on Economics: Economics and Comparative Advantage

Submitted By sa2013
Words: 2181
Pages: 9

“It may sound strange that Chinese firms are turning to Bangladesh to make clothes, not least because China is the global leader in clothing manufacturing and exports. But the shift is happening for very obvious reasons.” BBC new 29/08/2012. Using the theory of comparative advantage, discuss the possible reasons why this shift is being observed.

Globalisation from the facts of Economics ‘is considered by a rise across borders in the flow of goods, services and financial resources alongside with a rise in international movement of technology material and characters’ Boyes & Melvin (2011). As it was announced on BBC News (2012) about how Chinese companies are moving to Bangladesh to make clothes even though China is a worldwide leader in the manufacturing businesses. Absolute advantage involves the specialism of trade benefit among countries, well as according to the law Comparative advantage is that ‘when one Country has fewer efficiency then it has absolute disadvantage with detail to the further Countries production of both merchandises, there is still a source for commonly useful trade’ Simatele (2013). Heckscher- Ohlin (H-O) theory is founded on two theories, the H-O theorem and the factor price Equalisation theorem. The following essay will outline the trade established on Absolute advantage, H-O Theorem, the theory of Comparative advantage and the way the theory opportunity cost can be used to explain Comparative advantage then examples will be given to illustrate the movement of Chinese firms to Bangladesh to make clothes. Lastly a conclusion will be given to sum up the essay.
Absolute advantage according to Adam Smith’s innovative account of the case for trade, enclosed in The Wealth of Nations (1776), was contained in positions of absolute cost variances among countries. That is, Smith supposed that both countries will have advantage from the specialism in those merchandises happening which has an absolute advantage for example if it can produce at a lesser real cost than a different country, trading them and bring in other merchandises that it produces at a greater real cost than a different country Eicher, Mutti & Turnovsky (2009). For example China is said not to have absolute advantage in the agricultural segment.
David Ricardo explains Comparative Advantage in his principle of the political Economy and taxation (1817), indicated that the advantages of trade embrace in a more universal set of situations and is not influenced by another country or a discrete taking an absolute cost advantage. As an alternative, trade will have an advantage among countries, if an individual has their comparative cost that is the proportions of their real costs in positions of labour efforts are unlike for the two or more merchandises. Therefore, trade will be determined by comparative advantage, and one country can benefit from trade with a different country although its real costs are greater (or lesser) in all merchandises. It is the source of comparative advantage that causes the increase from the separation of labour, even if it’s among individuals, businesses, constituencies or countries. We focus in certain events in which we have comparative advantage, reliant having others to fund us with other goods and services, since specialism of real income rises. The theory that can be used to explain the source of comparative advantage is the theory of opportunity cost, which is the cost of any activity dignified in relations of the value of the subsequent best substitute good. The theory of opportunity cost explains that the labour theory of the value over the use that is a currently acquainted theory of opportunity cost, which was announced by Gottfried Habaerler (1936). Opportunity cost of product A is the amount of a product B which is specified to gain an item of A. Uncertainty just sufficient land, labour and capital are reserved from B to allow the manufacture of an