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Critically assess the argument that countries will be better-off if they engage in international specialization and trade.

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Introduction

Question: Critically assess the argument that countries will be better-off if they engage in international specialization and trade. One of the most remarkable features of the post-war world economy is liberalisation of international trade. Change in trade policy strategies and the trade policy environment are among the reasons why trade has grown nearly five times faster than world output (as Chart 1 show) and also why global trade growth increased by 9 per cent in 2004, more than twice as fast as output1. But is this strategy of specialisation and trade really a good way how to make countries better-off? Chart 1 Growth of World Exports of Manufactures and GDP, 1950-2003 (1950=100) Source: World Trade Organisation For a country to become richer there is only one way how to achieve it and this is through increase in production of goods and services. In order to do so, it must be able call upon resources of land, capital and productive and entrepreneurial skills2. These factors of production and their specific parts, however, differ from country to country not only by their total amount but also their mutual ratios causing different premises toward their efficiency in every segment of economy. This fact was applied as an explanation to the theories written below and known as Heckscher-Ohlin theorem3 . In other words each country has better (or worse) disposition to produce a particular product cheaply (or more expensive) than another one. ...read more.

Middle

Resources Required to Produce Production & Consumption before Specialization 1 ton of Potatoes 1 Laptop tons of Potatoes Pieces of Laptops Russia 25 30 90 125 Spain 20 15 135 220 Total Output 225 345 Comparative advantage is said to have such country which opportunity cost (OC) of X in terms of Y is less than in other country. Now we can notice that Spain has a comparative advantage only in producing of laptops (and is twice as much efficient in this production) - OC of one laptop is 3/4 ton of potatoes compared to 6/5 in Russia. Nonetheless, Russia has a comparative advantage in potatoes, it can produce one ton of potatoes at an OC of 5/6 of one laptop (whereas in Japan it is 4/3). Based on these facts countries decided to reallocate their resources into industry where their comparative advantage takes place. New higher partial and total production and consumption numbers can be found in Table 2b. Need to be said that specialization based on comparative advantage does not have to necessarily lead to higher production in each of particular goods. What is true though is an increase in the total sum of those products. Table 2b Comparative Advantage (after Specialization and Trade) Production after Specialization Consumption after Specialization Potatoes (tons) Laptops Potatoes (tons) Pieces of Laptops Russia 240 0 100 150 Spain 0 400 140 250 Total Output 240 400 So far our examples connected with theories of absolute and comparative advantages suggest that countries will always be better-of if they engage in trade. ...read more.

Conclusion

The influence of globalisation is another factor that could make a country from the cultural point of view worse-off. Then there is an effect of over specialization saying that if a country's wealth depends on export of limited variety of goods and services abroad, the fall in demand for these products could cause severe problems to domestic economy. In order to round off the picture we should outline the most important attributes of trade that make countries prosper. Basically, what economic theory has been suggesting for centuries, a country cannot be better-off without economic growth. Based on absolute and comparative advantage this could be achieved since specialization and trade supports employment with consequence of an increase in income, consumption and investments resulting in economic growth through the shift of production possibility frontier13 outwards. Countries can further benefit from the import of new technology and higher variety of product on the market has always been for public welfare. In conclusion it is necessary to call the reader's attention to the fact that despite accord with commonsense, most statements presented here rely on general basis. For a comprehensive judgement many qualifications, conditions and factors should be considered in each of countries which go beyond this paper. Nonetheless, weighting up all the statements above we can come to a general conclusion that, with respect to some special conditions when there is no cost advantage between countries and some strategic and short-term domestic arrangements, countries engaging in international specialization and trade will always be better-off. ...read more.

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