Business

Business

Introduction

The world is now moves towards different direction that means their interest to make their investment have been changed from the United States towards the Asian giants that involves India and China. Both of these countries enjoys the comparative advantage in the modern Era where current super power United States does face little problem due to high cost of labor (Ravi & Nejat, 2007).

Discussion

Comparative Advantage

This theory has defined as the one country has specialized for producing a one particular product and the other country does have the specialization for producing other particular product so they will interest to their goods. Things do mater a lot if a single country does have the specialization for producing both the goods then should the two countries still interested in trade? This particular question brings the concept of opportunity cost and comparative advantage.

According to the term of economics for producing goods and services from the company in order to producing the other particular goods and services the term has known to be opportunity cost. For example if one country can produce one pound of chocolate and two pounds of cheese in an hour. When country chooses for producing the chocolate then on other hand it will forgoes the chance for producing two pounds of cheese. Therefore the two pounds of cheese is known to be opportunity cost. Country sacrifices two pounds of cheese in order to make the one pound of chocolate.

Comparative advantage for the country does occurs in which the goods have the lower opportunity cost. In which the goods will be producing and sacrificing for least produce. In the above example the country will have a comparative advantage for producing the cheese. Comparative advantage does just not affect the decisions over production for nations but it also affects the goods prices which they are producing. After making the successful trade in world market by two countries their goods will falling between both countries opportunity cost.

According to Ricardo the English economist have suggest the opportunity cost will be relative towards the international trade. From the point of view of international trade theory every country will produces some goods which are most suitable in term s for the natural endowments quality of climatic soil, capital, and means of transport and other availability of resources. They were engaged for producing such goods according to their own country requirements and the exchanging the surplus amount with importing goods from other country in which they are not have capacities of producing in lower cost or not at all they able to produce. Thus all the countries engaged in producing and exporting commodities in which they have the advantage of cost and importing those goods in which they have disadvantage on cost (Malone & Mukherjee, 2010).

David Ricardo has stated that the other things should remain equal, the country which tends for specializing in and they exporting those goods in the tem of production which they have the maximum advantage on cost and minimum advantage on ...