...ECO2023 DAVID RICARDO & THE COMARATIVE AND ABSOLUTE ADVANTAGE David Ricardo was one of those rare people who achieved both tremendous success and lasting fame. After his family disinherited him for marrying outside his Jewish faith, Ricardo made a fortune as a stockbroker and loan broker. When he died, his estate was worth more than $100 million in today’s dollars. At age twenty-seven, after reading Adam Smith’s The Wealth of Nations, Ricardo got excited about economics. He wrote his first economics article at age thirty-seven and then spent the following fourteen years—his last ones—as a professional economist. Ricardo first gained notice among economists over the “bullion controversy.” In 1809 he wrote that England’s inflation was the result of the Bank of England’s propensity to issue excess banknotes. In short, Ricardo was an early believer in the quantity theory of money, or what is known today as monetarism. In his Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815), Ricardo articulated what came to be known as the law of diminishing marginal returns. One of the most famous laws of economics, it holds that as more and more resources are combined in production with a fixed resource—for example, as more labor and machinery are used on a fixed amount of land—the additions to output will diminish. Ricardo also opposed the protectionist Corn Laws, which restricted imports of wheat. In arguing for free trade, Ricardo formulated the idea of...
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...Ricardo: The Intellectual Contributor The aim of this paper is to point out how the great thinker David Ricardo continued or answered some of the unresolved questions in Adam Smith’s theories. David Ricardo started off as a stockbroker then turned to an economist. He was a man who contributed to numerous areas of economic theory, including methodology, diminishing returns, rent, theories of value, and international trade. Ricardo began studying economics around 1799 at age 28, and published his first pamphlet “The High Price of Bullion” in 1810. His book (which is also his major work) “The Principles of Political Economy and Taxation” replaced Adam Smith’s “Wealth of Nations” with regard to economic questions. When it came to political economy, Adam Smith had two ways of dealing with the questions. The first was through deductive theory, which he would use for his economic analysis. The second, he would present a well described, informative narrative of present and historical organizations. Ricardo, however, absorbed from his present economy and used the deductive method as a base to build an analysis. Thus, he represented “the pure theorist at work”. It is worthy to note that Ricardo had a firm position on the fact that “theory was a prerequisite to concrete analysis of the policy issues of the real world.” With the brief bibliography presented, and the different (yet brief) methods of each economic scholar explained, the three topics this paper will cover are the Labor...
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...Question 1.1: Explain how a change in the demand or supply affects the equilibrium price and quantity in any market. What is “demand”? Demand is the outcome of decisions about which wants to satisfy, given the available means. If you demand something (in the economic sense), it means that you intend to buy it and that you have the means (the purchasing power) to do so. In simple terms, when we talk about demand we are referring to the quantities of goods or services that the potential buyers are willing and able to buy. The law of demand states that if all other factors remain equal, the higher the price of a good, the less people will demand that good. Simply, the higher the price, the lower the quantity demand. Chart 1 above was downloaded from “www.investopedia.com/university/economics/economics3.asp” Point A,B,C clearly shows a negative demand relationship. As the price increases, the lower the quantity demanded. What is “supply”? Mohr et al (197:2004) defines supply “as the quantities of a good or service that producers plan to sell for a possible price during a certain period.” Producers must be able to supply the quantities concerned although there is no guarantee that the quantity supplied will be actually sold. The quantity sold will depend on the demand for the product or service. The greater the demand, the greater the quantity sold. Chart 2 above was downloaded from “www.investopedia.com/university/economics/economics3.asp” Points A,B,C clearly...
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...Emerging Economies and Globalization Argosy University Module 5: Assignment 1 LASA 2 BUS6512 Jerome Bates June 4, 2015 Table of Contents Abstract……..………………………………………………………………………………p.3 General Electric Health (History)..…………………………………………………………p.4 Theories Behind the GE Healthcare Move…………………………………………………p.4 International Product Lifecycle.…………………………………………………………....p.5 Comparative Advantage……………………………………………………………………p.6 Possible Pitfall of the Strategy……………………………………………………………..p.8 Solutions to Pitfalls…………………………………………………………………………p.9 HR Strategy in India………………………………………………………………………..p.9 HR Strategy in China……………………………………………………………………….p.10 Training Design (India,China)………………………………………………………………p.10 Conclusion…………………………………………………………………………………..p.11 References………………………………………………………………..…………………p.12 Abstract Untapped markets are not always available, but are out there; the question is, how do you find those markets? How do you tap the untapped? How do you find untapped markets with the proliferation of growth in economies, societies and markets within a world that is becoming a market without defined borders? As companies continue to grow and trade also expands, it now is crucial that MNC’s looking to expand their business, look for growth in a global lens sense. In this essay, the discussion will be just that. How MNC’s can reach untapped markets and expand the growth of their business, most notably, General Electric Health. This has been made possible due to the continuous...
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...Definition of comparative advantage: The ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins. Having a comparative advantage - or disadvantage - can shape a company's entire focus. For example, if a cruise company found that it had a comparative advantage over a similar company, due ito its closer proximity to a port, it might encourage the latter to focus on other, more productive, aspects of the business. It is important to note that a comparative advantage is not the same as an absolute advantage. The latter implies that one is the best at something, while the former relates more to the costs of the particular endeavour. Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it was written) is unnecessary in free trade. Popularized by David Ricardo, comparative advantage argues that free trade works even if one partner in a deal holds absolute advantage in all areas of production - that is, one partner makes products cheaper, better and faster than its trading partner. The primary fear for nations entering free trade is that they will be out-produced by a country with an absolute advantage in several areas, which would lead to imports, but no exports. Comparative advantage stipulates...
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...Comparative Advantage and Absolute Advantage ______________________________________________________________________________________________ absolute advantage: A country, individual, or firm has an absolute advantage in producing a good if production of the good absorbs fewer resources (or less time, in the case of an individual) than are required in other countries or by other individuals or firms. comparative advantage: A comparative advantage in producing or selling a good is possessed by an individual or country if they experience the lowest opportunity cost in producing the good. ______________________________________________________________________________________________ Comparative Advantage The division of labor facilitates production of a given good, but how do individuals or groups determine which specific goods or services to produce? The maximum potential gains from trade tend to be realized if you specialize in that activity which you can do at the lowest cost relative to other people’s costs. In 1817, David Ricardo, an influential early economist, focused on international trade when he generalized this idea into an economic law. The law of comparative advantage: Mutually beneficial exchange is possible whenever relative production costs differ prior to trade. This law applies to all exchanges, whether between individuals or nations. Opportunity cost is the key to comparative advantage: Individuals and nations gain by producing goods...
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...the new comer or any other company bench mark itself against the work leader consequently it will try to improve the efficiency and productivity in comparison to principal company which ultimately enhances the company’s performance. 2. What are the essential arguments in favor of free trade and against free trade? Favor Free Trade - Law of comparative advantage - Increased competition leads to lower prices for consumers - Open economies lead to increased technological development and innovation - Higher standard of living - Better understanding of nations Against Free trade - Free trade benefits US companies rather than citizens - Environmental exploitation - Human Rights issues - Reduction in domestic wages - Lower domestic competitiveness as a result of developing facilities elsewhere Ch 2 3. Is it possible to estimate the gains from trade? Explain when it can bet estimated and when it can’t. Since the early 1600s Mercantilists has developed theory for measuring gains from trades with the assumption that a trade surplus would eventually lead to increase domestic productiona nd employment. In the 18th century used David Hue’s price-specie-flow doctrine states trade is good for the short run but now for the long run. Inflow of gold or other form of wealth will lead to an increase in the price of domestic goods. Higher prices for those goods will eventually lead to increased imports and decreased exports. If you can create surplus trade, every nation would...
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...CHAPTER 1 GLOBALIZATION AND THE MULTINATIONAL FIRM SUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONS QUESTIONS 1. Why is it important to study international financial management? Answer: We are now living in a world where all the major economic functions, i.e., consumption, production, and investment, are highly globalized. It is thus essential for financial managers to fully understand vital international dimensions of financial management. This global shift is in marked contrast to a situation that existed when the authors of this book were learning finance some twenty years ago. At that time, most professors customarily (and safely, to some extent) ignored international aspects of finance. This mode of operation has become untenable since then. 2. How is international financial management different from domestic financial management? Answer: There are three major dimensions that set apart international finance from domestic finance. They are: 1. foreign exchange and political risks, 2. market imperfections, and 3. expanded opportunity set. 3. Discuss the three major trends that have prevailed in international business during the last two decades. Answer: The 1980s brought a rapid integration of international capital and financial markets. Impetus for globalized financial markets initially came from the governments of major countries that had begun to deregulate their foreign exchange and capital markets. The economic integration...
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...OXFORD HOUSE COLLEGE MBA Assignment INTERNATIONAL BUSINESS ENVIRONMENT “ The Contrasting Perspectives and Interests of Developed and Developing Coutries with Respect to Global Trade Liberalisation” by HAKAN AYDIN London MAY 2010 International trade is one of the international political economy’s most controversial subjects. The trade structure is the set of relationships between and among states, international organisations, international businesses and nongovernmental organisations that together influence and manage international rules and norms related to what is produced, where, by whom, how, for whom and at what price. Together with the international financial, technological and security structures, trade links states and other actors, furthering their interdependence, which benefits but also generates tension between and among these actors and different grroups within them. International trade is a process that occurs when goods and services cross national boundaries in exchange for money or the goods and services of another nation. Trade is always political and the most debated topic in international political economy. In the absence of a world government, cross border trade is always subject to rules that must be politically negotiated among nations and sovereign in their own realm but not outside their borders. (Kuttner Robert and Knopf, 1991, p:157) International trade ties countries together, and in so doing, generates...
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...Microeconomics 8/27/14 Economics is a social science that studies how people allocate their limited resources to satisfy their unlimited wants Microeconomics consist of consumers, firms, individual markets Examples: a sales tax on the cigarette industry, agricultural price support programs on the cotton industry Macroeconomics consist of economy as a whole (economic growth, inflation, unemployment), how economies interact Examples: an increasing inflation rate on national living standards, an increasing inflation rate on national living standards, Obamacare Economic models- Model: a simplified representation of reality Graphs and equations The Circular-Flow Diagram • Households – Consume goods and services – Own factors of production (e.g. labor) • Firms: – Produce goods and services Learn the Role of consumers and firms • Importance of markets • Economic agents are interrelated Does not include government, international markets, unemployment, raw materials, non-profits, banks or bank regulators, no illegal activities Course Outline • Markets – Gains from Trade – Supply and Demand – Efficiency of Markets – Price Controls, Taxes • Consumers and Producers – Making Decisions • What if markets fail? – Monopolies, Externalities, Public Goods Microeconomics Notes 8/29/14 • Today: –Opportunity cost – Production possibility frontier –Gains from trade • Scarcity – trade-offs • Making choices: compare benefits and costs Opportunity cost: what you...
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...CHAPTER 1 GLOBALIZATION AND THE MULTINATIONAL FIRM SUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONS QUESTIONS 1. Why is it important to study international financial management? Answer: We are now living in a world where all the major economic functions, i.e., consumption, production, and investment, are highly globalized. It is thus essential for financial managers to fully understand vital international dimensions of financial management. This global shift is in marked contrast to a situation that existed when the authors of this book were learning finance some twenty years ago. At that time, most professors customarily (and safely, to some extent) ignored international aspects of finance. This mode of operation has become untenable since then. 2. How is international financial management different from domestic financial management? Answer: There are three major dimensions that set apart international finance from domestic finance. They are: 1. foreign exchange and political risks, 2. market imperfections, and 3. expanded opportunity set. 3. Discuss the three major trends that have prevailed in international business during the last two decades. Answer: The 1980s brought a rapid integration of international capital and financial markets. Impetus for globalized financial markets initially came from the governments of major countries that had begun to deregulate their foreign exchange and capital markets. The economic integration and globalization that began in the eighties...
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...CHAPTER T W O 2 International Economics Tenth Edition The Law of Comparative Advantage (Part 1) Dominick Salvatore John Wiley & Sons, Inc. In this chapter: Introduction The Mercantilists’ Views on Trade Trade Based on Absolute Advantage: Adam Smith Trade Based on Comparative Advantage: David Ricardo Comparative Advantage and Opportunity Costs The Basis for and the Gains from Trade under Constant Costs Introduction Basic questions: What is the basis for trade? What determines which country exports each good? What are gains from trade? What benefits do countries get from international trade? Which goods are exported/imported by each country? What is the pattern of trade? Assume two-nation, two-good world The Mercantilists’ Views on Trade Mercantilism Economic philosophy in 17th and 18th centuries, in England, Spain, France, Portugal and the Netherlands. Belief that a nation could become rich and powerful only by exporting more than it imported. A nation’s wealth is measured by the amount of precious metals it owns. The Mercantilists’ Views on Trade Mercantilism Export surpluses bring inflow of gold and silver. Trade policy was to encourage exports and restrict imports. Mercantilists advocate excessive government intervention to impose this trade policy. Trade is a zero-sum game: One nation gains only at the expense of another. In other words, mutual benefits...
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...Chapter 1 – Globalization and the Multinational Enterprise Eiteman, Stonehill & Moffett Multinational Business Finance, 12th Ed A Multinational Enterprise (MNE) is one that has operating subsidiaries, branches, or affiliates located in foreign countries. a. MNEs may be headquartered anywhere in the world. b. MNEs are often owned by a mixture of domestic and foreign stockholders. c. Ownership in a MNE may be so dispersed internationally that they may be known as transnational corporations. d. MNEs are often managed from a global perspective rather than from the perspective of any single country. e. The term enterprise is used rather than corporation because as business move into many emerging markets, they will enter into business arrangements with various types of enterprises that are not corporations such as joint ventures, strategic alliances, or simply operating agreements with enterprises that may not be publicly traded or even privately owned, but are actually extensions of the government. Domestic firms may export their products or not. Domestic firms may license foreign firms to conduct the domestic firm’s foreign business. Domestic firms are not protected from international competition. Purely domestic firms must understand the multinational nature of business today. Globalization and Creating Value in the Multinational Enterprise To become a successful multinational enterprise requires (1)...
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...decades (see chart 5). In many countries average real wages are flat or even falling. Meanwhile, capitalists have rarely had it so good. In America, Japan and the euro area, profits as a share of GDP are at or near all-time highs (see chart 6). Corporate America has increased its share of national income from 7% in mid-2001 to 13% this year. Like so many other current economic puzzles, the redistribution of income from labour to capital can be largely explained by the entry of China, India and other emerging economies into world markets. Globalisation has lifted profits relative to wages in several ways. First, offshoring to low-wage countries has reduced firms' costs. Second, employers' ability to shift production, whether or not they take advantage of it, has curbed the bargaining power of workers in rich countries. In Germany, for example, several big firms have negotiated pay cuts with their workers to avoid moving production to central Europe. And third, increased immigration has depressed wages in sectors such as catering, farming and construction. Most of the fears about emerging economies focus on jobs being lost to low-cost foreign competitors. But the real threat is to wages, not jobs. In the long run, trade and offshoring should have little effect on total employment in rich countries; rather, they will change its composition. So long as labour markets are flexible, job losses in manufacturing should eventually be offset by new jobs elsewhere. But trade with emerging economies...
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...Outline OPENING CASE: The Ecuadorian Rose Industry INTRODUCTION AN OVERVIEW OF TRADE THEORY The Benefits of Trade The Pattern of International Trade Trade Theory and Government Policy MERCANTILISM Country Focus: Is China a Neo-Mercantilist Nation? ABSOLUTE ADVANTAGE COMPARATIVE ADVANTAGE The Gains from Trade Qualifications and Assumptions Extensions of the Ricardian Model Country Focus: Moving U.S. White Collar Jobs Offshore HECKSCHER-OHLIN THEORY The Leontief Paradox THE PRODUCT LIFE CYCLE THEORY Evaluating the Product Life Cycle Theory NEW TRADE THEORY Increasing Product Variety and Reducing Costs Economies of Scale, First Mover Advantages and the Pattern of Trade Implications of New Trade Theory NATIONAL COMPETITIVE ADVANTAGE: PORTER’S DIAMOND Factor Endowments Demand Conditions Related and Supporting Industries Firm Strategy, Structure, Rivalry Evaluating Porter’s Theory Management Focus: The Rise of Finland’s Nokia FOCUS ON MANAGERIAL IMPLICATIONS Location First-Mover Advantages Government Policy SUMMARY CRITICAL THINKING AND DISCUSSION QUESTIONS CLOSING CASE: Trade in Information Technology and U.S. Economic Growth Learning Objectives 1. Understand why nations trade with each other. 2. Be familiar with the different theories explaining trade flows...
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