Comparative advantage and the open economy. I defend the claim that comparative advantage will increase wealth creation to both the rich and the poor state. Comparative advantage is the ability to produce a commodity at a lower opportunity cost than what others producers are producing with. Opportunity cost simply means foregoing one commodity for the other. For a gain among individuals or nations, each person or country must be specialized in producing a commodity. Comparative advantage on depends greatly on the ability of a nation to understand the usage of technologies (Miller 12). In order for a country, to become rich it has to be able to produce and export goods that are; able to connect well with other products, sophisticated.
Countries should, therefore, be able to formulate policies that will enable the production of more connected and sophisticated products that are able to compete in the international market (Jesus & Kumar 10). Two nations that specialize in different commodities can be able to increase their output by trading. When a country specializes in the production of a commodity, they gain comparative advantage and can be able to engage in international trade.
To show the comparative advantage among nations, I considered a 2good 2 country world. We take an example from a developed world and a developing nation i. e. America and India respectively (Miller 8). Developing nation like India has the skills in the production of computer software’s and also computers. America, on the other hand is a developed nation with the ability of producing both computers and software’s. However, India can produce a lot of software’s than they can computers.
America is also skilled in producing computers more than they can software’s. In order for the two nations to increase their output, they have to sacrifice one for the other. This is the opportunity cost. They have to forego one commodity to produce the other (Miller 20). The opportunity cost of producing computer software is lower in India than US. The opportunity cost of producing computers is lower in the States than in India. The US, therefore, hold a comparative advantage in computer manufacturing and India in Software production. These two nations will benefit from engaging in international trade.
The US will allocate their resources in the productions of computers and India in software production (Miller 18). India will have to forego the production of computers to concentrate more on software production. It is specialized in this sector. United States will have to forego Software production to concentrate more on Computer manufacturing. This specialization in one field increases the output level of both nations. India will double its level of output in software production same as United States in Computers (Miller 16). In order for countries to gain, they will participate in international trade to exchange their goods.
Specialization increases the output level of any given sector. India will increase its wealth by selling the software, increasing its economic standards (Miller 21). Comparative advantage in production should be set to meet that target. Countries that have highly skilled workers should specialize in goods that require expensive skills, while the countries with low skill workers, and specialize in primary production. In manufacturing industries, highly skilled nations produce advanced commodities while the low skill nations produce the raw materials.
This relation will lead to wealth creation across borders (Miller 28). In conclusion, when a country specializes in the production of a commodity that it has a comparative advantage of and participate in the international trade, the nation tend to gain more from this trade and increase their wealth. Specialization in the production of goods for which a nation has a comparative advantage of, allows both countries to produce efficiently and effectively. Works Cited Jesus Felipe, Utsav Kumar. "How Rich Countries Became Rich and Why Poor Countries Remain Poor. " The Economic Journal 49 (2010): 1–36. Miller, Roger LeRoy.
Economic Today: The Macro View. 2011.