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Name : Julanda S. H.

AL-Hashmi Professor: Salim kublawi Class: Eco 305 Assignment: International Economics Date: 29th April, 2012

Table of Contents

Table of Contents.1

International Economics2


Comparative advantage refers to the ability of a country or a person for producing a specific good or services at a lower marginal and opportunity cost to each other. This explains why trade is still more beneficial even if one country seems to be better at producing both of two goods, compared to another country. Even if one country is more conductive in the production of all goods than the other, at this case the two countries will addition by trading with each other, unless they dont have different associated conductive. David Ricardo was one of the Most Influential of the classical economist. In his most important contribution was the law of comparative advantage. In his explained 1817 book, on the principle of political economy and taxation in an example, which involved both countries England and Portugal. In Portugal both wine and cloth could be produced with less Labor than in England. However the relative costs of both goods are different in the two countries. Portugal could produce both goods easily. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other. Comparative advantage provides a powerful explanation for the advantages of specialization in production.

Even in extreme cases where individuals have an absolute advantage in two activities or occupations they will be better off specializing in that activity or occupation for which they are relatively better. This is the activity or occupation for which they have a comparative advantage. Mutually beneficial trade occurs between two individuals when each specializes in the activity or occupation for which he or she has a comparative advantage, or the area for which the opportunity cost of their effort is less. The same logic may be applied to groups of individuals or nations. For example, comparative advantage explains the pattern of trade between two nations: mutually beneficial trade occurs between two nations when each specializes in the production and export of the product for which it is the lower opportunity cost producer, and imports the product for which it has a higher opportunity cost. In other words, a nation will tend to export goods to another nation for which it has a comparative advantage and will import goods for which it has a comparative disadvantage. Comparative advantage could be determined by many actions such as the natural resource or climate change, sometimes by the accumulated skills and capital, by government assistance, others could be involved over time, such as worked skills, education, and technology. Trade is usually beneficial to both countries even if one has an absolute advantage in the production of both goods that are to be traded. Given any two products, a nation has a comparative advantage in the product with the lower opportunity cost.

The terms of trade must be such that both countries lower the opportunity costs of the goods they are getting from the trade. Why do countries have different opportunity costs? They have different endowments of productive resources -warmer climates and longer growing seasons; more plentiful natural resources such as oil, iron ore, and water; more highly educated and skilled workers; and larger quantities of more sophisticated machinery. World trade is not static. It has been increasing both in amount and in significance. New supplies of natural resources can be discovered and developed while existing supplies are better managed. Human resources can be improved through better educational programs. Capital resources can be acquired to make the better-trained workers even more productive. The increase in world trade should result in more efficient use of the world's scarce resources, and in higher standards of living. The analysis of trade in goods and services while no factors of production-labor, capital, or land- move between countries. In the real world, there are movements of capital-called international capital flows- and movement of labor- termed migrationbetween countries. The effects of allowing for movement of these factors to our analysis, we will add an important variant of capital movement, that of foreign directs investment abroad (FDI). The International movement of productive factors is the movements of labor, capital, and other factors of production between countries.

International factor movements occur in three ways: immigration/emigration, capital transfers through international borrowing and lending, and foreign direct investment. International factor movements also raise political and social issues not present in trade in goods and services. Nations frequently restrict immigration, capital flows, and foreign direct investment. Which consists into many contents. Substitutability of factors and commodities Trade in goods and services can to some extent be considered a substitute for factor movements. International labor mobility International labor migration is a key feature of our international economy. For example, many industries in the United States are heavily dependent on legal and illegal labor from Mexico and the Caribbean. Substitutability and complementarity of foreign and domestic labor International borrowing and lending is another type of international factor movement; however, the "factor" being moved here is not physical, as it is with labor mobility. Instead, it is a financial transaction. Foreign Direct Investment is the ownership of assets in a country by foreigners where the ownership is intended to provide control over those assets. Multinational enterprises manage production or deliver services in more than one country.

Tariff and non-tariff barriers can affect countries business in their exports. Most countries governments appoint this trade barriers and the conventional with full intent behind them is to limit or constantly ban the imports of some specific products.

By demanding trade barriers, the governments are looking to accomplish some or this entire economic objectives: Encouraging domestic production. Protecting local employees. Increasing revenues. Reducing devastation and interdependent on exports. Both Tariff and non-tariff barriers can exclusively hurt the national economy in the longer term. They even provide shield to those under achieving industries and manufactures are not competitive at all. The World Trade Organization was implanted in order to lower the risk of the trade barriers all over the world, and to improve transparency and non-discrimination in international trade.


International Economics 13th Edition/2011 Robert J. Carbaugh