Comparative Advantage and Optimal Trade Policy †MyAssignmenthelp

Question: Discuss about the Comparative Advantage and Optimal Trade Policy. Answer: Introduction: The GDP is ineffective welfare measure. GDP doesnt reflect the true economy health. A compressive measure like HDI is required since GDP fails to integrate welfare measures. GDP solely describes the value of all finished products produced within a country over a period of time. None of GDPs computation method include indicators of welfare. GDP is a proxy of a proxy measure hence lacks validity as welfare (Kubiszewski et al. 2013). It only include market transactions but disregards voluntary/domestic work with considerable impact on welfare which enhance living standards. GDP excludes black market transactions and unlawful activities with adverse impacts on welfare. In comparing the welfare of any two countries utilizing GDP per capital and the UNs HDI, the following two images are used in terms of literacy level. The 2006 figures can be used to compare the GDP and HDI. Based on 2006 figures retrieved from: https://www.nationmaster.com/country-info/stats/Economy/GDP , the figures indicate that United States ranks number one with a GDP of $13.2 trillion (current USD), whereas Japan comes next with $4.34 trillion, Germany with $2.90 trillion and China with $2.60 trillion. These countries at the topic take the lead in terms of activities happening within their borders but doesnt essentially mean that their populace are better off than the remaining countries in terms of the overal welfare. HDI figures (drawn from: https://www.nationmaster.com/country-info/stats/Economy/Human-Development-Index) indicate that Norway ranks top with highest HDI of 0.963, Iceland follows with HDI of 0.956 and Australia third with 0.955, Canada, Luxembourg and Sweden are tied at fourth position with 0.949. Niger is last with HDI of 0.281. Since HDI is relatively more detailed than GDP, countries that ranks high in GDP take lower ranks with HDI. As US is merely rank 10th, Japan 11th, Germany 20th and China eighty-fifth. This is because HDI includes additional indicators thereby allowing it provide a better image of state of well-being of the populace of a country. Citizens in Norway live longer lives than US citizens. Norway has a life expectancy at birth of 82.9 years in 2006 while US life expectancy merely stood at 77.70 years. The investment spending by firms is determined by the rate of interest criterion. Low rates of interest have always stimulated the housing construction while construction is reduced by higher rates of investment. There is a reciprocal relationship between the interest rates and the investment in the residential establishments in both Australia and the United States. Such a relationship is applicable to all forms of the investment: Higher rates of investment has a tendency to decrease the investment quantity, whereas lower rates of interest surge investment quantity. The investment demand curvature can be used to show an investment curvature for economy (Gilchrist, Sim and Zakrajek 2014). This curvature demonstrates the investment quantity demanded at each rate of interest, holding other determinants of demand fixed. At the lower rate of interest of r2, then demand curve for investment indicates that the investment quantity demanded shall ascend to B a year. A decrease in the rate of interest hence triggers the movement along the curvature of investment demand. The investment curve indicates the volume of the investment expenditure a year at every rate of interest in both countries, Ceteris paribus other determinants of investment. The curvature indicates that as the rate of interest declines in both Australia and the US, the investment level per year surges. A decline in rate of interest from r1 to r2 in both countries, for instance, would surge investment from A to B billion dollars a year, Ceteris paribus other investment determinants. From the above graph, the implication for behaviour of investment based on interest rate on GDP growth is two-fold. A reduction in interest increases investment and thus increasing the production and hence increased GPD in both Australia and the United States. On the contrary, an increase in the rates of interest will lead to a reduction in investment thus leading to less GDP in both Australia and United States. Comparative advantage drives the international trade. It is economic law that denotes economys ability to produce commodities at lowest opportunity cost than another country. A country will decide to produce the goods it can best produce and export and import the goods it cannot produce best (Laursen 2015). Comparative advantage benefits the country if it is relatively efficient at producing some goods by specialization, even when it lacks absolute advantage in its production (Costinot, Donaldson, Vogel and Werning 2015). Simply put, despite other countries being able to undertake the production of such commodities increasingly efficiently, an economy has to specialize in particular commodities where the opportunity-cost of such production is lowest in that economy (Laursen 2015). The forgone cost describes the immediate cost of best use which might be made of resources dedicated to the commodities production. Specializing in products that it produces relatively efficiently, an economy would sell more and subsequently surge its income. Comparative-advantage helps a company to specialize in products it is comparatively most efficient and effective, subsequently the total national output hence the national income could be surged (Laursen 2015). The country can produce more of such goods than it needs and export them to another country whereas utilizing the proceeds from export to purchase imported commodities that it does not produce. A country thus pushes its PPF outward hence surging its national output. All players (countries), at all times, are able to benefit mutually from the collaboration alongside free trade with comparative advantage, Comparative advantage is a useful concept in the theory of international trade. Riccardo demonstrated how Portugal (wine) and England (clothing) benefit by specializing and trading to their comparative advantage. The comparative advantage of China with the US is in terms of inexpensive labour. The workers of China produce unsophisticated consumer products at very extreme lower opportunity-cost (Laursen 2015). The US comparative-advantage is in specialized capital-intensive labour. The American employees produce sophisticated products/investment opportunities at the lowest opportunity cost. Both China and U.S. have gained by specializing as well as trading along such lines in a free-trade between both economies. References Costinot, A., Donaldson, D., Vogel, J. and Werning, I., 2015. Comparative advantage and optimal trade policy. The Quarterly Journal of Economics, 130(2), pp.659-702. Gilchrist, S., Sim, J.W. and Zakrajek, E., 2014. Uncertainty, financial frictions, and investment dynamics (No. w20038). National Bureau of Economic Research. Kubiszewski, I., Costanza, R., Franco, C., Lawn, P., Talberth, J., Jackson, T. and Aylmer, C., 2013. Beyond GDP: Measuring and achieving global genuine progress. Ecological Economics, 93, pp.57-68. Laursen, K., 2015. Revealed comparative advantage and the alternatives as measures of international specialization. Eurasian Business Review, 5(1), pp.99-115. https://www.nationmaster.com/blog/?p=45