The Theory Of Comparative Advantage Essay

1394 Words Sep 7th, 2015 6 Pages
Question 1
EXPLAIN THE THEORY OF COMPARATIVE ADVANTAGE. WHAT ARE ITS IMPLICATIONS FOR AUSTRALIA?
The theory of Comparative Advantage (CA) can be explained in two ways:
First, the typical definition states that CA is “the relative or absolute advantage that one country has over the other”. It is Country A’s ability to produce a good/service at a lower opportunity cost than Country B. For example, which will be explained further below, Australia’s ability to produce Iron Ore (Along with other resources and commodities) and trade with China’s consumer goods/manufacturing – which would cost Australia more money to produce internally. The theory also states that a country that has CA will increase their countries economic welfare. CA can be split into two “types”:
1. “Inherent” -- Natural Resources – I.e. Australia’s Mining
2. “Created” -- Knowledge based capital accumulation – I.e. China’s lower labour costs
Secondly, The positive impact of CA includes an increase in a countries total production of the good or service they produce, which leads to “fatter wallets” or increased prosperity. Furthermore, as the increase in exports occurs, the country can utilize the funds to offset costs incurred from importing products with their trade country. This can be illustrated by looking at Australia and their trade relationship with China, specifically Australia’s resources and commodities Industry, and China’s manufacturing industry. To demonstrate my above point, as Australia as a…

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