Global Economics

Developingcountries andcomparativeadvantageVibhav M.Unde

Vibhav M.Unde11005780

Global Economics 2

Due to the declination of barriers to the free flow of goods, services and capitals

there have been brisk increase in global trade which resulted into globalization.

Other factors influencing are fast and developed transport, easy and inexpensive

communication, and internet. Substantial reductions in government, trade

restraints and trade tariffs had played a crucial role. So due to globalization, the

world is moving away from self-contained national economies towards an

interdependent and integrated global economic system. The comparative

advantage theory was developed by David Ricardo in 1817. Comparative

advantage is an ability of a firm or individual to produce goods/services at a lower

'opportunity cost' than other firms or individuals. It gives advantages to sell goods

and services at a lower price than its competitors and recognize strong sales

margins. It is a main perspective to decide the entire economic entities focus.

For example, if an automobile company found that it had a comparative

advantage over a similar company, due to its closer availability of vendors; it

might encourage the latter to focus on other, more productive aspect of the

Business.

There are various factors which influence the comparative advantage of a

country Availability and its quantity and quality of natural resources; oil and gas,

farmland, minerals are key factors, along with geographic location and climate of

the country which plays and crucial role. Secondary factors may be considered

as capital, readily available low-cost labor along with this tax and tariff

legislation, export subsidies, import taxes result into comparative advantage.

Investment in research and development of a particular segment can also play a

major role as it drives innovation and invention. Fluctuations in the exchange rate

can affect the relative prices of exports and imports. This can result into changes

in demand from domestic and overseas market

China becomes the worlds manufacturing hub due to comparative advantage

may now be starting to work against China, based on a growing body of

evidence. It means that each country or region should manufacture or create

what it can do most efficiently using the least amount of recourses. This is just

like that American and Western European counterparts, Chinese companies and

workers must now move up the value chain and begin to produce products that

require high degrees of skills and are not easily transferable to lower wage

Vibhav M.Unde11005780

Global Economics 3

countries. The alternative is a future where other lower wage Asian countries

become the worlds next generation production hub. To grasp a main difference

between developing countries like Brazil, China and India, it is important to study

the composition of GDP. As of now, the participation of agriculture in Brazils

GDP is 5 percent compared to 13 percent in China and 18 percent in India.

Urbanization is more advanced in Brazil than in China or India. And yet, the

proportion of manufactured exports as a percentage of total exports is more than

90 percent in China and around 70 percent in India, but barely reaches 50

percent in Brazil.

Comparing GDP of these countries points to distinct comparative advantages

and this is reflected in the composition of their exports. Brazilian agricultural

exports are important, though small share of value added from agriculture in

GDP as the Brazil has an enormous comparative advantage in agriculture. This

is due to favorable resources available for farming; abundant water, vast

extensions of arable land, an efficient system for the development and research

organizations that disseminate methods for achieving two crops a year to

increase agriculture output. As an effect of this there was vast growth in export of

Brazil has been led to growth trade shock that began in 2004. In contrast, an

authentic industrial revolution lies behind Chinese growth, while in India the

informatics revolution both software development and the provision of services

is the biggest star that attracts investment and defines the corporate profile of

the country.

From the 2007 it looked like a promising period in Brazil; there was a tremendous

increase in export of agro goods. As per the opinion of various economist it will

rise by 25 % of this is a key reason for economic growth. Investment in

agriculture-business and minerals were followed by investment in the industrial

sector and in the rest of the economy. From the start of year 2006 to mid-2007,

industry created more new jobs than other sectors. This was due, fact that the

industrial sector requires much more work force that agriculture because of the

various reasons.

WTO Director-General Pascal Lamy defend free trade well as the reduction (in

our case, lack of) measures that discriminate against foreign goods and services

Vibhav M.Unde11005780

Global Economics 4

Free trade allows countries to compete on the basis of their competitive and

comparative advantages. It means countries don't have restriction to sell in

international market what theyre best at on the open. Everyone gains with free

trade because it results in the ultimate of economic efficiencies: countries

produce for export according to their comparative advantage and import the rest.

This is the result of some aspects like no import surcharges, no dumping, readily

available transportation. Its a slippery slope we traverse in attempting to define

what truly free trade would look like. Tax holidays, capital grants, and business-

friendly tax policies would not be anti-free trade unless they were designed to

favor domestic over foreign firms.

The case for free trade is robust. It extends not only to overall prosperity or gross

national product (GNP), but also to distributional outcomes, which makes the free

trade argument morally compelling as well. In India, the shift of accelerated

growth after reforms that included trade liberalization has pulled nearly 200

million people out of poverty. In China, which grew faster, it is estimated that

more than 300 million people have moved above the poverty line since the start

of reforms.

Key factors of free trade

Nonextience of import quotas and tariffs, subsidies or special incentives

that are specifically construed to favor domestic over foreign companies

or export-oriented industries over others.

No barrier for technology transfer.

Lenient legislation for foreign direct investment (FDI).

Mutual investment treaties along with banking systems fully open to

foreign institutions.

Protection of intellectual property and an international court to implement

free trade that will help to treat foreign firms as favorably as domestic

firms.

Vibhav M.Unde11005780

Global Economics 5

Disadvantages of free Trade

Free trade can be considered as double-edged sword. It also has huge

disadvantages. For any country in the free trade zone is directly related to its

industrial and arability of natural resources. This means that less industrialized or

developed members of a free trade region may have to face economical losses

until such countries overcome their technological obstacles or find alternative

aspects of trade.