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TRL3704 ASSIGNMENT 5 SEMESTER 2 2023
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TRL3704Assignment number: 05
Year: 2023 (SEMESTER 2)
PREVIEW:
Global trade is widely practiced and considered beneficial for various reasons.
One key advantage is the stimulation of economic growth through expanded market access. By
participating in global trade, countries can reach a larger customer base beyond their domestic
boundaries, leading to increased sales and revenue. This concept is supported by the example
of China's economic rise. According to a study by Zhang and Felbermayr (2017), China's
engagement in global trade, particularly as a major exporter of manufactured goods, has
significantly contributed to its economic development and poverty reduction.
, 1.1 Global trade is widely practiced and considered beneficial for various reasons.
One key advantage is the stimulation of economic growth through expanded market
access. By participating in global trade, countries can reach a larger customer base
beyond their domestic boundaries, leading to increased sales and revenue. This
concept is supported by the example of China's economic rise. According to a study by
Zhang and Felbermayr (2017), China's engagement in global trade, particularly as a
major exporter of manufactured goods, has significantly contributed to its economic
development and poverty reduction.
Another reason for the benefits of global trade is the principle of comparative
advantage. This theory, proposed by economist David Ricardo, suggests that countries
should specialize in producing goods and services in which they have a lower
opportunity cost compared to other nations. This specialization allows countries to
maximize their efficiency and productivity. An example of comparative advantage can be
illustrated through Saudi Arabia's dominance in the oil market. Due to its abundant
reserves of crude oil, Saudi Arabia has focused on oil production, utilizing its
comparative advantage to become a key exporter and generate substantial economic
growth (World Bank, 2020).
1.2 One classical trade theory that explains the benefits of specialization and
international trade is the theory of comparative advantage.
According to Ricardo's theory, countries should specialize in producing goods in which
they have a comparative advantage. This leads to efficient allocation of resources and
increased global production. A practical example of comparative advantage can be
demonstrated by the trade between two hypothetical countries, Country A and Country
B. If Country A can produce wheat more efficiently and at a lower opportunity cost
compared to textiles, while Country B can produce textiles more efficiently, both
countries can benefit by specializing in their respective areas of comparative advantage
and trading the goods. This example is in line with the theory of comparative advantage
(Krugman, Obstfeld, & Melitz, 2018).
Another classical trade theory is the Heckscher-Ohlin theory, which emphasizes the role
of factor endowments in shaping a country's comparative advantage. According to this
theory, countries will specialize in producing goods that intensively use their abundant
factors of production and import goods that require inputs in which they are relatively
scarce. For instance, if Country X has abundant agricultural land but a scarce labor
force, while Country Y has limited land but an abundant skilled labor force, Country X is
likely to specialize in agricultural production and export agricultural products to Country
Y. In contrast, Country Y may specialize in manufacturing, utilizing its skilled labor force
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