Questions about Traditional international trade theories
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Select two countries that could apply traditional international trade theories (absolute advantage, comparative advantage, factor endowment) to enhance their participation in international trade. Finally, explain how each identified institution could help facilitate the trading process between the two countries. Please include reference .
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Solution Summary
Based on two countries, this solution applies the traditional international trade theories (absolute advantage, comparative advantage, factor endowment) to enhance their participation in international trade, as well as examines potential ways to facilitate the trading process between the two countries. References are included.
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1. Select two countries that could apply traditional international trade theories (absolute advantage, comparative advantage, factor endowment) to enhance their participation in international trade. Finally, explain how each identified institution could help facilitate the trading process between the two countries. Please include reference.
Let's go with China and Australia:
ILLUSTRATIVE EXAMPLE:
ABSOLUTE ADVANTAGE
Adam Smith proposed the theory of absolute advantage (1776). The argument was that "a country has an absolute advantage in the production of a good when it can produce more of that good with a given amount of resources than another country" (1) .
An example using China and Australia can illustrate the principle of absolute advantage. Let us assume the following: With a given amount of resources Australia can produce 30 units of wheat and 20 units of cloth, whereas China can produce 5 units of wheat and 25 units of cloth. In this instance, Australia produces more wheat while China can produce more cloth. Therefore, Australia then has an absolute advantage in the production of wheat and China an absolute advantage in the production of cloth. Trade would be beneficial with all things being equal. However, other things need to be considered, such as trade ...
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