Comparative and Absolute Advantage

Comparative and Absolute Advantage
ECO/561
2017
Comparative and Absolute Advantage
Comparative and absolute advantage of products, help influence the national output for a nation. Understanding the difference between these and the type of advantage a nation has will help to show the overall economic growth of each country. Knowing where the nation falls in the business lifecycle can help to forecast future economic growth and what needs to be done in order to achieve that economic growth. This paper compares four countries and the GDP and lifecycle stages for those countries in order to show the economic growth for each nation.

Measures of Economic Growth/Comparative and Absolute Advantage

GDP 2016 data from Tradingeconomics.com, show the ranking of the following countries. Based on the 2016 numbers, only China and the United States (U.S.) show positive changes (increase) in GDP compared to previous measurements; whereas, the Democratic Republic of Congo and Saudi Arabia show a decrease.

China’s continued growth since opening doors to economic reforms in 1978 “lifted 500 million Chinese out of poverty,” and in 2012 the country hit a trade surplus of $319.92 million (Jain, 2014). Scholarly studies state China’s cheap labor continues to be its comparative advantage (Chun, 2014). China bases absolute power on low-cost manufacturing of products. In comparison, articles state the relative benefit of the U.S is the ability to attract higher paying jobs (Strosko, 2016); whereas absolute position is in the production of wheat. The Democratic Republic of Congo’s natural resource is its comparative advantage, and its agricultural products are the country’s absolute position. As far as Saudi Arabia, comparative and absolute advantage is the oil reserves.

Economic, Political, and Cultural Development Research

The U.S. has the most technologically powerful economy in the world, with a per capita GDP of $54,800. In the hierarchy, Congress makes the laws. As stated by the author Claude Fischer, “the United States cultural can be captured by the word more (Fischer, 2010).” Mr. Fischer further states that “Modern Americans have more of almost everything: more time on Earth, more wealth, more things, more information, more power, more acquaintances, and so many more choices (Fischer, 2010).” One could say that the American cultural has evolved at a high rate of speed over time.

China currently is considered the largest exporter in the world. However, it became necessary for China to expand the private sector and develop a better banking system for international trade. Based on research in 2015, “China stood as the largest economy in the world, surpassing the U.S. for the first time in modern history. China’s per capita income is below the global average (CIA.gov, 2017a).” As of 2015, the world average per capita income is 10,057.926 (World Bank, 2015). China’s political and cultural development is based on socialism, where the government has control over the “free” market. As stated in part, by the staff writer at Independenceday.com, “China is a socialist country, directed by the people. The worker-peasant union and practicing people’s democratic centralism, is the primary system in the country (Independenceday.com 1999).”

Saudi Arabia’s economy has an abundance of oil. The country possesses about 16% of the world’s proven petroleum reserves (CIA.gov, 2017b). Saudi Arabia is also currently the leading exporter of said oil. Saudi Arabia’s political development is Islamic, “one nation, one ruler” monarchy. The leader sets social standards and rules all, including government. The Democratic Republic of Congo (DRC) is a nation possessing numerous natural resources. The DRC political development rests on a Republic government. As stated by the staff writer at Everyculture.com, “The government is what some have called a “kleptocratic” dictatorship, in which the constitution and separate executive, legislative, and judicial branches existed on paper only (Everyculture.com. 2017).”

Comparison of Country Economic Data

The gross domestic product is perhaps the best way to measure our national level earnings. It becomes a lot harder to account for every dollar spent, however some variables that indicate GDP growth are imports, exports, and wages. Having understood how the national output generates provides the bases for how the concept operates, and how products are produced and how each product is included and/or excluded.

Some variables are wages and employment rate. This helps to account for the national output. Although the national growth is, for the most part, healthy since 2008, studies show that the GDP growth has decreased by two points when contrasted to other countries like Ireland. In addition, in past years the United States is in second place, and presently has declined by three percent. The U.S. GDP generated significant earnings in the past two years with substantial growth. However, if this was to be compared to prior years, the last few years show a large decrease. When income is combined, this appears stable and China appears to be a great competitor, in the long run. China shows an exponential growth between 2009 and 2050. The United States will eventually become third in the long-term for their own Domestic Gross Products earnings due to regulatory measures by the Central and Federal reserve growth. Between 1972– 2015 data shows an increase from 4.2-15.4. With this projection the gross domestic is not being excluded individually. By compounding the data, there should be a better understanding of how complex data shows the GDP. Although most data growth since the year of 2008 until 2016 is, for the most part, the same; the sharpest increase was in the years of 2008 to 17 percent growth. This is 7 points above since 1990 which was 10.5.

Reasons for Varied Economic Growth

The United States’ current growth rate is 1.9% (U. S. Department of Commerce, BEA & Bureau of Economic Analysis, n.d.). It has recovered steadily from the 2009 recession. China’s continuous growth rate is 6.8%. This may give the perception of being the world’s leading economy; however, when GDP is compared, 2009 numbers show the U.S. GDP was $15 trillion and China was $5 trillion (Scissors, 2011). Despite having a population four times that of the U.S., growth rate depends on trade and the global market for manufactured products. Saudi Arabia, on the other hand, has seen a GDP decline to 11% according to 2016 numbers (U.S Bureau of Economic Analysis, n.d.). This may be due to the continuing decline in crude oil prices. With 73% of the government’s budget dependent on crude oil prices, Saudi Arabia’s budget deficit increased (Grennes, Strazds, 2016). The Democratic Republic of Congo has the potential to become one of Africa’s richest countries. Despite the comprehensive natural resources, continued political uncertainty has a direct effect on the economy. Also, the global economic recession saw a decrease in the demand for Congo’s minerals (Democratic Republic of Congo Overview, 2016).

Economic Lifecycle Stages

Economic lifecycle stages fall in four phases of economic growth and decline: contraction, trough, expansion, and peak. The economic life cycle of the U.S. is the expansion stage. As the U.S. is entering a phase where recession is over; and the country is entering a market of recovery based on the GDP, income and employment increases. Based on the GDP for Saudi Arabia, the economic lifecycle is expansion as the GDP is over 3%. However, as the GDP is showing a decline, the expansion phase could slowly result in a contraction and/or trough as the GDP declines. China’s economic lifecycle is at peak stage as the GDP is over 6% change. Finally, the Democratic Republic of the Congo is in the trough stage. The GDP is nonexistent for this country.

Products with Comparative/Absolute Advantage

The U.S. has an absolute advantage in trade with certain agricultural goods and textile products. The U.S. can produce agricultural products such as corn, for example, more efficiently than others because of vast land, prime soil and advanced industry technology. This results in enormous output and limited inputs, equaling absolute advantage (McConnell, Brue, & Flynn, 2015). The U.S. has attained comparative advantage in exporting products such as industry machinery, crude and refined petroleum, vehicles, and pharmaceuticals. The U.S. has an extensive list of products earning a solidified comparative advantage. The U.S. can manufacture large amounts while limiting opportunity costs because of organic materials, equipment, technology, etc. (Neary, 2003).

China has earned full advantage with manufactured goods in general when it comes to international trade. China also has comparative trade advantage with products such as electronics and vehicles. China has built a strong export business position primarily because of an extremely low cost of labor. The entire major manufacturing and production cost reduction has attracted countries from around the world to have products manufactured in China. “China’s trade pattern is influenced not just by its overall comparative advantage in labor-intensive goods but also by geography” (Harrigan, & Deng, 2008, pg. 1). China uses its local for shipping and distribution of products worldwide to its maximum advantage.

Saudi Arabia owns global trade absolute advantage in crude oil and gasoline products. Without a doubt, Saudi Arabia has a comparative advantage with the trading of polypropylene and various refined crude oil products. Saudi Arabia not only has an endless abundance of crude oil natural resources but can retrieve crude oil in mass quantities and expeditiously faster than anyone in the world. Saudi Arabia is also thoroughly proficient in refining crude oil into numerous petroleum based products for trade export. The country of Saudi Arabia is also becoming a serious contender and gaining competitive advantage in the transportation shipping industry (Jasimuddin, 2001).

The Democratic Republic of Congo could but does not have an absolute advantage in any particular product for international trade. The Democratic Republic of Congo does have somewhat of a similar lead with trading products such as diamonds, copper, timber, and coffee. Although the Democratic Republic of Congo is plentiful in certain products, the country is in political turmoil and embellished within the internal conflict. The current state of corruption leaves the country as a whole struggling to establish infrastructure and evade common criticism. The harsh internal retaliation makes it almost impossible for economic development within the business cycle or advancement within the global market (Eaton, & Kortum, 2002).

Conclusion

Based on the information provided on China, the U.S., Saudi Arabia, and the Democratic Republic of the Congo, the economic growth, comparative/absolute advantages, and lifecycle stages are identified. Comparisons are provided based on the information gleaned through research. The various information helps to further identify how the international economy fluctuates.

References

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