DOCSLIB.ORG

Revealed Comparative Advantage: a Study of India and ASEAN Economies

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Revealed Comparative Advantage: a Study of India and ASEAN Economies Lal Bahadur Shastri Institute of Management, Delhi LBSIM Working Paper Series LBSIM/WP/2020/18 Revealed Comparative Advantage: A Study of India and ASEAN economies Rashmi Ahuja August,2020 LBSIM Working Papers indicate research in progress by the author(s) and are brought out to elicit ideas, comments, insights and to encourage debate. The views expressed in LBSIM Working Papers are those of the author(s) and do not necessarily represent the views of the LBSIM nor its Board of Governors. WP/August2020/18 LBSIM Working Paper Research Cell Revealed Comparative Advantage: A Study of India and ASEAN economies Rashmi Ahuja Lal Bahadur Shastri Institute of Management Dwarka , Delhi Abstract The trade relations between India and ASEAN economies have gained more attention among academicians and researchers especially after India initiated ‘Look East Policy’ in 1991. It gained even more importance after its upgraded version of ‘Act East policy’ and also the recent withdrawal of India from Regional Comprehensive Economic Partnership (RCEP). This paper aims to explore India’s comparative advantage with that of nine ASEAN economies in different product groups at SITC one-digit level classification for the period 2009-2018. This empirical analysis uses Balassa (1965) measure of Revealed Comparative Advantage (RCA). Our findings suggest that India has maintained stable comparative advantage in two primary product group and two labour-intensive product groups while Indonesia has maintained comparative advantage in highest number of product groups among all ASEAN economies over the considered period of study. Further, we identified that India could leverage its trade potential in two product groups i.e. Chemical and related products & manufactured Goods to further strengthen its trade relation with ASEAN. Keywords: Revealed Comparative advantage, ASEAN , India JEL classification: F14, F10, F13, B27,F4 Revealed Comparative Advantage: A Study of India and ASEAN economies 1. Introduction International trade has been one of the important elements of globalization during the past few decades. A number of International Trade theories (For instance, Absolute advantage, Comparative advantage by Ricardo, H-O theory, New trade theories etc) came up and tried to explain the reasons for occurrence of trade and the various patterns of international trade that exists among the countries. However, Ricardo’s Comparative advantage is still widely used as one of the important reasons for international trade and predicting the bilateral trade relations between the countries. The comparative advantage relates about how much productive or cost efficient is one country to another. After the pioneer work by Balassa (1965), Revealed comparative advantage (RCA) index became the standard method of calculating the comparative advantage in different economies. Established in 1967, ASEAN has now become one of the growth centres in the world economy. ASEAN is a diverse group consisting of economies at different levels of development such as Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. If ASEAN were a single market then it represents the third largest market after China and India. Bilateral Relations between India and ASEAN get more strengthened with the formulation of ‘Look East Policy’ initiated in 1991. Further, India has also signed a bilateral free trade agreement (FTA) with ASEAN. India’s bilateral trade with ASEAN stood at $142bn in 2018 which is expected to reach $300 billion by 20251. Of total $142 bn total trade, $97 billion is in the merchandise and around $45 billion is in services. There has also been huge amount of Foreign Direct Investment (FDI) equity inflows into India from ASEAN economies i.e. $91 billion for the period April 2000-June 2009. Further, there has been economic cooperation between ASEAN and India in the form of various Joint ventures, aids and other incentives. After the withdrawal of India from Regional Comprehensive Economic Partnership (RCEP), India’s existing bilateral relationship with ASEAN has gained further attention. ASEAN is one of the important trading partners for India over the past few years. There exists an immense potential to transform India-ASEAN bilateral relationship into a sound economic partnership in the form of a robust trade bloc. Inspite of existence of such potential trade and investment oppourtunies between India and ASEAN, the fact that India has a trade deficit with the ASEAN over the past few years2 needs immediate attention. Against this background, it becomes even more important as well as interesting to examine the trade complementarities between ASEAN and India so that efforts could be made to realize the full trade potential between these two. This paper has twofold objective: Firstly, it examines the 1 As per study by PHD Research Bureau, PHD Chamber of Commerce and Industry. https://www.phdcci.in/wp- content/uploads/2019/11/Indias-Trade-and-Investment-Opportunities-with-ASEAN-economies.pdf , Accessed on 3th April,2020. 2 India’s trade deficit with ASEAN has increased from 9.86 percent in 2012-2013 to 21.85 percent in 2018-2019. https://commerce.gov.in/InnerContent.aspx?Id=74 ,Accessed on 4th April,2020. structure of comparative advantage in India and nine3 ASEAN economies over the period 2009-2018. Secondly, it does a comparative evaluation of the similarities in the pattern of revealed comparative advantage for these ten economies. The rest of the paper is organized as follows. Section 2 presents a selective review of literature and section 3 talks about the methodology used in the paper. Section 4 discusses the RCA analysis for India and ASEAN economies. Finally, the last section concludes. 2. Selective Review of Literature There have been number of studies in the literature that have employed index of revealed comparative advantage to examine the comparative advantage for various economies. This section presents a select review of such studies in the literature. Balassa (1977) analysed the pattern of comparative advantage for industrial countries for the period 1953-1971. They found the evidence for existence of an association between the size and diversification of exports. Further, their findings suggest that first the export diversification increases with increase in technological development and then decrease with further increase in technological development. Richardson and Zhang (1999) used the Balassa RCA index to examine and interpret comparative advantage in US across time, trading partners and regions at different level of commodity classifications. They found these patterns of comparative advantage for US to be different across different parts of the world. Some of the reasons which they found for these differences are geographical proximity of the trading partners and influence of per-capita income (specially in case of manufacturers). Ferto & Hubbard (2002) examines the competitiveness of Hungarian agriculture in relation to the EU for the period 1992 to 1998 using indices of Revealed comparative advantage. Their findings suggest that Hungary has revealed comparative advantages for eleven of the 22 aggregated product groups: live animals; meat; cereals; vegetables and fruit; sugar; beverages; oilseeds; cork and wood; and animal and vegetable materials, oils and fats. Further, it also suggests that Hungary’s markets are unlikely to become less distorted with membership of the EU, at least in the medium term. Batra & Khan (2005) performed a systematic comparative evaluation of the similarities of the pattern of revealed comparative advantage for India and China for the years 2000 and 2003. They calculated RCA for all the ninety-seven chapters of the Harmonized System (HS - 1996) classification as well as at the more disaggregated six-digit level for both the countries using their exports data. Their analysis suggests that sectors that rank among the top ten according to the value of the index of RCA are not necessarily able to retain their position when ranked according to comparative advantage at the more disaggregated 6-digit level. Further, their findings also suggest that both the countries enjoy comparative advantage in Manufactured goods chiefly classified by material. Akhtar et al (2008) analysed the performance of footwear industry of Pakistan at two-digit as well as four-digit level and compared it with that of China and India. The study period is from 1996 to 2006.Their findings suggest that there has been shift in the comparative 3 Our study has considered nine economies and not considered Philippines due to unavailability of data for the period considered in the study. advantage in Pakistan from disadvantage to comparative advantage over the study period. Their findings also suggest that India and China have comparative advantage in the foot-wear industry since 1990 but it is decreasing since 2001. Startiene & Remeikiene(2014) examined the competitiveness of the Lithuanian industrial products in global markets using Revealed Comparative Advantage index and Revealed symmetric comparative advantage index during the period of 2007–2011. Their findings from the RCA and RSCA values indicates that the Lithuanian food, chemicals, wood and textile manufactures captures the strongest competitive positions in global markets. Laosutsan et al (2017) explored the economic impacts of trade liberalization and improved connectivity on Thailand exports of 23 vegetable product groups to the ASEAN member states (AMSs) using the Revealed
Load more

Recommended publications
  • Comparative Advantage and Trade Performance: Policy Implications”, OECD Trade Policy Papers, No
    Please cite this paper as: Kowalski, P. (2011), “Comparative Advantage and Trade Performance: Policy Implications”, OECD Trade Policy Papers, No. 121, OECD Publishing. http://dx.doi.org/10.1787/5kg3vwb8g0hl-en OECD Trade Policy Papers No. 121 Comparative Advantage and Trade Performance POLICY IMPLICATIONS Przemyslaw Kowalski JEL Classification: F11, F14, F16, F17 OECD TRADE POLICY WORKING PAPERS The OECD Trade Policy Working Paper series is designed to make available to a wide readership selected studies by OECD staff or by outside consultants. This document has been declassified on the responsibility of the Working Party of the Trade Committee under the OECD reference number TAD/TC/WP(2010)38/FINAL. Comments on the series are welcome and should be sent to [email protected]. OECD TRADE POLICY WORKING PAPERS are published on www.oecd.org/trade © OECD 2011 Applications for permission to reproduce or translate all or part of this material should be made to: OECD Publishing, [email protected] or by fax 33 1 45 24 99 30 Abstract COMPARATIVE ADVANTAGE AND TRADE PERFORMANCE: POLICY IMPLICATIONS Przemyslaw Kowalski Trade Policy Analyst, Development Division, OECD This paper builds on recent generalisations of theory and empirics of comparative advantage and establishes the relative importance of different sources of comparative advantage in explaining trade, with particular focus on policy and institutional factors. The broad policy and institutional areas posited as determinants of comparative advantage in this paper include: physical capital, human capital (distinguishing between secondary, tertiary education and average years of schooling), financial development, energy supply, business climate, labour market institutions as well as import tariff policy.
    [Show full text]
  • Comparative Advantage and Trade Policy - Bharat R
    INTERNATIONAL ECONOMICS, FINANCE AND TRADE – Vol.I - Comparative Advantage and Trade Policy - Bharat R. Hazari, Pasquale M. Sgro COMPARATIVE ADVANTAGE AND TRADE POLICY Bharat R. Hazari Professor of Economics, School of Economics, Deakin University, Melbourne, Australia Pasquale M. Sgro Professor of Economics, School of Economics, Deakin University, Melbourne, Australia Keywords: absolute advantage, autarky, community indifference curve, comparative advantage, consumer surplus, domestic market failure, dual markets, exports, first-best, factor endowments, free trade, import substitution, infant industry, Heckscher-Ohlin, imports, manufacturers, non-tariff barriers, optimal tariff, pattern of trade, producer surplus, production possibility curve, protection, quotas, Ricardo, second-best, tariffs, technological differences, transformation surface, tariff revenue. Contents 1. Introduction 2. Comparative Advantage 2.1. The Ricardian Theory of Comparative Advantage 2.2. The Heckscher-Ohlin Theory of Comparative Advantage 3. Free Trade 4. Tariff and Non-Tariff Barriers 5. International Trade Policy Glossary Bibliography Biographical Sketches Summary The theory of comparative advantage suggests that voluntary trade between nations takes place because it is mutually beneficial, and that the pattern of trade is determined by differences in comparative advantage. Despite the undeniable gains free trade produces, throughout history countries have applied both tariff and non-tariff barriers to restrict trade. The concepts of consumer and producer surplus are often used to measure both the welfare benefits of free trade and the welfare costs of imposing tariffs. Both economicUNESCO and non-economic reasons have – been EOLSS used justify the restriction of trade. 1. IntroductionSAMPLE CHAPTERS Nations trade with each other because they consider it to be mutually beneficial. The gains occur in at least two ways.
    [Show full text]
  • Preventing Deglobalization: an Economic and Security Argument for Free Trade and Investment in ICT Sponsors
    Preventing Deglobalization: An Economic and Security Argument for Free Trade and Investment in ICT Sponsors U.S. CHAMBER OF COMMERCE FOUNDATION U.S. CHAMBER OF COMMERCE CENTER FOR ADVANCED TECHNOLOGY & INNOVATION Contributing Authors The U.S. Chamber of Commerce is the world’s largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations. Copyright © 2016 by the United States Chamber of Commerce. All rights reserved. No part of this publication may be reproduced or transmitted in any form—print, electronic, or otherwise—without the express written permission of the publisher. Table of Contents Executive Summary ............................................................................................................. 6 Part I: Risks of Balkanizing the ICT Industry Through Law and Regulation ........................................................................................ 11 A. Introduction ................................................................................................. 11 B. China ........................................................................................................... 14 1. Chinese Industrial Policy and the ICT Sector .................................. 14 a) “Informatizing” China’s Economy and Society: Early Efforts ...... 15 b) Bolstering Domestic ICT Capabilities in the 12th Five-Year Period and Beyond ................................................. 16 (1) 12th Five-Year
    [Show full text]
  • Has US Comparative Advantage Changed? Does This Affect Sustainability?
    3 Has US Comparative Advantage Changed? Does This Affect Sustainability? The evidence is overwhelmingly persuasive that the massive increase in world competition— a consequence of broadening trade flows—has fostered markedly higher standards of liv- ing . this surge in competitive trade has clearly owed, in large part, to significant advances in technological innovation. —Alan Greenspan, chairman of the Federal Reserve Board, “Technology and Trade,” remarks before the Dallas Ambassadors Forum, Dallas, Texas (16 April 1999) [T]he globalization system . is not static, but a dynamic ongoing process: globalization involves the inexorable integration of markets, nation-states and technologies to a degree never witnessed before—in a way that is enabling individuals, corporations and nation- states to reach around the world farther, faster, deeper and cheaper than ever before. —Thomas L. Friedman, The Lexus and the Olive Tree (1999) Why Trade? People trade because they want different things, have different skills, and earn different amounts of money. With individuals represented by their national aggregates, countries trade for the same reasons. Countries differ from one another in terms of resources and the techniques firms use to produce goods and services. People value goods and services differently, depending on their income and tastes. Investors in financial assets have different preferences for risk, return, and diversification. These differ- 29 Institute for International Economics | http://www.iie.com ences are reflected across countries as differences in costs of production, prices for products and services, and rates of return on and “exposures”1 to financial assets. Because costs, prices, and returns differ across countries, it makes sense for a country to trade some of what it produces most cheaply and holds less dear to people who want it more and for whom production is costly or even impossible.
    [Show full text]
  • Agri-Food Export Competitiveness of the ASEAN Countries
    sustainability Article Agri-Food Export Competitiveness of the ASEAN Countries Tamás Mizik * , Ákos Szerletics and Attila Jámbor Department of Agribusiness, Corvinus University of Budapest, F˝ovám tér 8, 1093 Budapest, Hungary; [email protected] (Á.S.); [email protected] (A.J.) * Correspondence: [email protected] Received: 25 October 2020; Accepted: 23 November 2020; Published: 25 November 2020 Abstract: Agri-food trade competitiveness analyses are relatively understudied in the empirical literature with many countries/regions missing. The novelty of this paper to analyze the agri-food export competitiveness patterns of the Association of Southeast Asian Nations (ASEAN), thereby aiming to fill this gap in the literature. Our research questions include which countries and products are competitive in the ASEAN region in agri-food trade; whether raw materials or processed products are more competitive; whether regional or global agri-food trade is more competitive and how persistent competitiveness is in the long run. The paper is based on ASEAN–ASEAN and ASEAN–world agri-food trade flows from 2010 to 2018, thereby global and regional competitiveness patterns have become visible. Results suggest that Myanmar (18.88), Laos (8.21) and the Philippines (5.36) have the highest levels of agri-food trade competitiveness in the world market, while in regional markets, Laos (17.17), Cambodia (15.46) and Myanmar (12.39) were the most competitive. Both raw materials, as well as processed products, are generally competitive, and regional trade, in general, was more competitive than global trade for the majority of the countries. However, results suggest a generally decreasing trend in keeping these competitive positions, which is also supported by the duration tests.
    [Show full text]
  • Comparative Advantage and Specialization TRADE
    Comparative Advantage and Specialization TRADE We have learned enough about production that we can now begin our explanation of trade. TRADE - Assumptions Let’s assume there are two products (Food and computers). There are two countries: Europe, South America. TRADE the main question: To be self-sufficient and produce everything we need OR To cooperate with the other country & TRADE TRADE Trade is beneficial if one can only produce food while the other can only produce computer. Trade is good if Europe is better in one while South America is better in the other. – They should SPECIALIZE and trade. SomeSome points points on on South South America’s America's PPF PPC SomeSome points points on on Europe’s Europe's PPF PPC Computers Food Computers Food 200 0 400 0 100 200 200 100 0 400 0 200 TRADE But what happens if one is much better in producing both computers and food? A different example SomeSome points points on on South South America'sAmerica’s PPC PPF SomeSome pointspoints on Europe’sEurope's PPCPPF Computers Food Computers Food 250 0 200 0 125 125 100 50 0 250 0 100 They can still benefit from trade as long as opportunity costs are different. Opportunity Costs What is the opp. cost of 1 food in Europe? Let’s look at the extremes: 100 vs. 200 Opportunity Costs What is the opp. cost of 1 food in Europe? If you pick to produce 100 units of food … you give up producing 200 computers. 100 vs. 200 Opportunity Costs 100 vs.
    [Show full text]
  • 22 Comparative Advantage Measurement in ASEAN's Ten
    BISE: Jurnal Pendidikan Bisnis dan Ekonomi https://jurnal.uns.ac.id/bise p-ISSN 2548-8961 | e-ISSN 2548-7175 | Volume 4 Nomor 1 (2018) Ó Program Studi Pendidikan Ekonomi, FKIP Universitas Sebelas Maret Comparative Advantage Measurement in ASEAN’s Ten Leading Export Commodities: A Case Study of ASEAN-5 Estira Woro Astrini1, Nurul Azizah Az zakiyyah2 1 Magister Science of Economics, Faculty of Economics and Business, Gadjah Mada University 2 Non Functional Budget State Analys Setjen DPR RI Article Info Abstract DOI: This paper analyzed ASEAN-5’s comparative advantage of their best http://dx.doi.org/10.20 ten products using “products mapping” as now we faced ASEAN 961/bise.v4i1.17560 Economic Community (AEC). Its a need to know which commodities are those countries in comparative advantage and as a net exporter. JEL Classification: Using data retrieved from UN COMTRADE accessed from F13, Q56 INTRACEN website, we used information of best ten ASEAN’s leading export commodities which was under 2 digits HS classsification. For Keyword: ASEAN, analysis in this paper, we derived those products into 4 digits HS International Trade, classification, so then we were not only use 10 commodities but 320 TBI, Product Mapping commodities. Comparative advantage measurement that we used were Revealed Symmetric Comparative Advantage (RSCA), as for know if 1 this paper is a the countries were net-importer or net-exporter we used Trade Balance personal idea of the Index (TBI). Lastly, we combined those two indexes of comparative authors without advantage to draw each country’s products mapping. From the analysis, representing the we got the result that, Indonesia’s exported commodities (net-exporter) university or and comparative advantage mostly are from animal or vegetable fats organization and oil, Malaysia’s mostly are from rubber and articles thereof, Singapore and Thailand’s mostly from organic chemicals, and Philipines’s mostly from electrical and electrical equipment.
    [Show full text]
  • Answers: Free Trade Or Protectionism?
    www.hoddereducation.co.uk/economicreview Volume 36, Number 1, September 2018 Answers Free trade or protectionism? Jon Guest This resource provides answers to the questions set in the article on trade, on pp. 12–15 of the September 2018 issue of ECONOMIC REVIEW. Question 1 Using a simple numerical example, explain the difference between absolute and comparative advantage. The following example illustrates two countries that can use their resources to produce either whisky or motorbikes. The numbers in the table illustrate the number of motorbikes and bottles of whisky they can produce a day. Motorbikes Whisky Country A 9 36 Country B 6 12 Country A has an absolute advantage over Country B in the production of both goods. It can produce both more motorbikes and whisky per day than Country B. Comparative advantage depends on opportunity costs. The country with the lowest opportunity cost of producing a good has a comparative advantage in producing that good. Assuming the opportunity costs of using resources remain constant, the table below illustrates the opportunity cost of producing either one motorcycle or one bottle of whisky for each country. Opportunity cost of Opportunity cost of producing one motorcycle producing one bottle of whisky Country A Four bottles of whisky A quarter of a motorcycle Country B Two bottles of whisky Half a motorcycle Country B has a comparative advantage in producing motorbikes, i.e. it has a lower opportunity cost than Country A. It forgoes two bottles of whisky by using its resources to produce one motorbike whereas Country A forgoes four bottles.
    [Show full text]
  • Oecd Development Centre
    OECD DEVELOPMENT CENTRE Working Paper No. 16 (Formerly Technical Paper No. 16) COMPARATIVE ADVANTAGE: THEORY AND APPLICATION TO DEVELOPING COUNTRY AGRICULTURE by Ian Goldin Research programme on: Changing Comparative Advantage in Food and Agriculture June 1990 TABLE OF CONTENTS SUMMARY . 9 PREFACE . 11 INTRODUCTION . 13 PART ONE . 14 COMPARATIVE ADVANTAGE: THE THEORY . 14 The Theory of Comparative Advantage . 14 Testing the theory . 15 The Theory and Agriculture . 16 PART TWO . 19 COMPETITIVE ADVANTAGE: THE PRACTICE . 19 Costs and Prices . 19 Land, Labour and Capital . 20 Joint Products . 22 Cost Studies . 22 Engineering Cost Studies . 23 Revealed Comparative Advantage . 25 Trade Liberalisation Simulations . 26 Domestic Resource Cost Analysis . 29 PART THREE . 32 COMPARATIVE ADVANTAGE AND DEVELOPING COUNTRY AGRICULTURE . 32 Comparative Advantage and Economic Growth . 32 Conclusion . 33 NOTES . 35 BIBLIOGRAPHICAL REFERENCES . 36 7 SUMMARY This paper investigates the application of the principle of comparative advantage to policy analysis and policy formulation. It is concerned with both the theory and the measurement of comparative advantage. Despite its central role in economics, the theory is found to be at an impasse, with its usefulness confined mainly to the illustration of economic principles which in practice are not borne out by the evidence. The considerable methodological problems associated with the measurement of comparative advantage are highlighted in the paper. Attempts to derive indicators of comparative advantage, such as those associated with "revealed comparative advantage", "direct resource cost", "production cost" and "trade liberalisation" studies are reviewed. These methods are enlightening, but are unable to provide general perspectives which allow an analysis of dynamic comparative advantage.
    [Show full text]
  • World Trade Organization Economic Research and Statistics Division
    Staff Working Paper ERSD-2009-07 September 2009 World Trade Organization Economic Research and Statistics Division ENDOWMENTS, POWER, AND DEMOCRACY: POLITICAL ECONOMY OF MULTILATERAL COMMITMENTS ON TRADE IN SERVICES Martin ROY: WTO Manuscript date: September 2009 Disclaimer: This is a working paper, and hence it represents research in progress. This paper represents the opinions of the author, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the author. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Statistics Division, World Trade Organization, Rue de Lausanne 154, CH 1211 Geneva 21, Switzerland. Please request papers by number and title. i ENDOWMENTS, POWER, AND DEMOCRACY: POLITICAL ECONOMY OF MULTILATERAL COMMITMENTS ON TRADE IN SERVICES By Martin ROY1 Abstract In spite of their growing importance in international trade as well as in bilateral and multilateral trade negotiations, services have only attracted limited attention from researchers interested in determinants of trade policies and commitments. This paper draws from different approaches within the field of international political economy to try to explain why governments undertook different levels of market access commitments under the WTO's General Agreement on Trade in Services (GATS). The argument, which is supported by empirical analysis, suggests that democracy, relative power, relative endowments, and the WTO accessions process have a significant impact on multilateral commitments on trade in services. JEL Classification: F5, F13, L8, D72 Keywords: trade in services, GATS, democracy, relative power, endowments, WTO accessions, determinants of cooperation, determinants of international commitments, international negotiations.
    [Show full text]
  • International Economics Questions Part I Question D
    International Economics questions Part I A nation's ability to produce a product more efficiently than another country is referred to as a. globalization. b. foreign trade. c. interdependence. d. absolute advantage. Question A nation's ability to produce a product more efficiently than another country is referred to as a. globalization. b. foreign trade. c. interdependence. d. absolute advantage. Answer Nebraska specializes in the production of corn and Maine specializes in the production of lobsters, therefore the two states could engage in trade that benefits both parties. This law of economics is known as a. supply and demand. b. parallel consumption. c. comparative advantage. d. relative distribution. Question Nebraska specializes in the production of corn and Maine specializes in the production of lobsters, therefore the two states could engage in trade that benefits both parties. This law of economics is known as a. supply and demand. b. parallel consumption. c. comparative advantage. d. relative distribution. Answer Country X and Country Y are the same size in terms of population, area, and capital stock. If both countries devote all of their efforts to producing widgets, Country X can produce 10 million widgets, while Country Y can produce 5 million. Based on the information given, Country X has a. a monopoly on the production of widgets. b. an absolute advantage in producing widgets. c. a comparative advantage in producing widgets. d. a lower opportunity cost in the production of widgets. Question Country X and Country Y are the same size in terms of population, area, and capital stock. If both countries devote all of their efforts to producing widgets, Country X can produce 10 million widgets, while Country Y can produce 5 million.
    [Show full text]
  • 44 Chapter 3 the Theory of International Trade And
    CHAPTER 3 THE THEORY OF INTERNATIONAL TRADE AND CUSTOMS UNIONS 3.1 Introduction This chapter focuses mainly on the economic theory of international trade or comparative cost advantage, the theory of Customs Unions and the political economy of regional trading blocs. Because Botswana belongs to a customs union (SACU) as well as a regional economic and trading bloc (SADC), theories concerning the two trade formations are essential for one to understand how the benefits stemming from trade liberalization and regional integration can be maximized while costs are minimized. International trade liberalization and regional integration are considered as potential ways of improving per capita food consumption, household food security, foreign income and earnings, etc (Sarris, 1997; Yeats, 2000; Lewis, 2001; Lewis, Robinson & Thierfelder, 2002). Since both SACU and SADC are liberalizing their economies as well as working towards trade integration, the theories of comparative advantage as well as those regarding customs unions and regional economic blocs are useful in establishing how to promote sustainable development. Further, it is also expected that Botswana as a member of SACU is likely to enter into a free trade agreement with the EU as well as the US. The envisioned SACU-EU FTA will represent an expansion of the current South African-EU trade arrangement while negotiations on the future SACU- US FTA are ongoing. The proposed FTAs with SACU are expected to provide opportunities for Botswana, while also exposing her least competitive industries to more risks/threats. Before considering the theories of international trade economics, it is worth understanding from the outset why nations trade in the first place.
    [Show full text]