Total word counts excluding References - 2487

The term "Trade" refers to the exchange of goods and services. When there is trade across the
country, it is “International trade”. Buying and selling goods and services across national
borders is called international trade (Moneyinstructor.com, 2020). International trade is the
exchange of services, goods and capital between different countries and regions without much
distraction (Economy watch, 2020). Commonly traded items include consumer goods such as
television sets and clothing; Capital goods such as machinery; and raw materials and food.
Other transactions include services such as travel services and payments for foreign patents.
(Robinson, Allias and Ballassa, 2020).

International trade plays a vital role among countries by enabling them to enjoy goods and
services that they cannot produce for themselves. However, countries do conduct international
trade on the basis of international trade theories. Absolute advantage and comparative
advantage theories, are the two examples of trade theories among many, and these two theories
are also referred to classical theories of international trade.

Adam Smith in 1776, and his argument was that countries should specialize in the production
of goods for which they have an absolute advantage and trade these for goods produced in other
countries. The idea of absolute advantage lies in many assumptions, although influential and
insightful, the policy of absolute good is not always entirely accurate, as many of these basic
assumptions are not in reality true. Absolute advantage is related to comparative advantage,
which opens up even wider opportunities for the division of labor and profits from the trade
(Agarwal, 2020).

This theory illustrates the idea that international trade is profitable if it is able to import products
that meet the needs of consumers instead of producing them in the domestic market. The core
of Adam Smith's theory is that the rule that guides transactions from any market, internal or
external, is to determine the value of commodities by measuring labor in goods. To prove its
theory, Adam Smith analyzed for start-up country A, using a factor of production, to estimate
the productivity of labor, the quantity of X and Y products produced in hours required to
produce it. The only organization of the economy. X is HLX and Y is HLY are identical to the
product X for labor, meaning H-hours, L-labor. Because all economies have limited resources,
there are limitations at the level of production, and if a country wants to produce a large
proportion of its output, it must abandon the production of another, abandoning the trade in this
case.

For a factor of production-labor, this country has 8 + 4 = 12 hours of labor. - The country can
produce 1 kg of cheese by 4 hours of labor, and the country can produce 1 liter of wine by 8
hours of labor. The opportunity cost is the number of units of measurement of product Y that
the economy must abandon to produce a sub-unit of product X.

PRODUCTS
COUNTRY Unit of products/units of time
WITHOUT TRADE AFTER SPECIALIZATION AND
TRADE
X Y X Y
A 6 3 12 -
B 3 6 - 12
Total 9 9 12 12

Country A has more productivity than B in X, and it has an absolute advantage in this
production and Country B has greater productivity than A in producing Y. It is reasonable and
in the benefit of 2 countries to concentrate all resources of labour to the product for which it
has absolute advantage. After specialization, exchanging products, both countries gain from
trade.

The comparative advantage theory was developed by David Ricardo, a continuation of Adam
Smith’s theory, his argument was that even if one country has the absolute advantage producing
two goods, that total output would still rise if it gave up production of one and imported that
good from another country (Hill, 2011). Comparative advantage is an economic term that
refers to the economy's ability to produce goods and services at lower opportunity costs than
its trading partners.

The key to understanding comparative advantage is a solid understanding of opportunity cost.

Simply put, the potential benefit that one loses when selecting one particular option over the
other is an opportunity cost. In the case of comparative advantage, the opportunity cost of one
firm is lower than that of another. The company with the lowest opportunity cost, and thus the
smallest potential benefit lost, has this type of advantage.

The theory demonstrated that by permitting specialization in production of the goods,

International trade provides a means of boosting the national income of both countries - even
if a country is less efficient in producing both goods (Krugman, 2003). Thus, for example, a
poor country may benefit from exporting agricultural goods and importing machinery from a
rich country, even though the productivity of both labor and capital in the agricultural sector is
lower than that of a rich country. The table and description below illustrate how the theory of
comparative advantage works.

Country Productivity Opportunity Cost

Hours / Monetary unit
X Y X Y
A 1 2 0.5 2.0
B 6 3 2.0 0.5

Country A produces more in X than in Y. Country B produces more in Y than X.

Each country should specialize in the production for which it has less opportunity cost,
therefore country A should produce X and country B should produce Y, because of comparative
advantage they have on those goods. So, the trade between these countries will benefit both
countries.

Both theories are to identify how international trade works. Countries and corporations make
this decision, where they can allocate their limited resources and make the most of it so they
can allocate less resources and make the most of their maximum production output.

The absolute advantage is that it describes a situation in which a company can produce a
product at a higher quality and a faster rate of profit than another competing business or country
can achieve. The comparative advantage focuses on the opportunity cost when choosing to
produce a wide variety of products with limited resources.

Adam Smith believed his theory was that the absolute advantage is that international trade
needs to happen to a profitable business. At the same time, David Ricardo's Theory of
Comparative advantage states that a country does not need an absolute advantage to perform a
profitable business because trade can result from a minimal investment in resources, and high
productivity can provide a country with a product that can produce a profitable business.

(Segal, 2020).

The two classical theories encourage specialization and trade between two countries, a country,
would lose out if it had insufficient resources. For example, Malawi earns forex through the
export of tobacco, and if they were unreliable rainfalls during the tobacco growing season it
means Malawi could lose its global customers since it mostly specialized in tobacco.

Factor Absolute Advantage Comparative Advantage

Definition Essential ability of a country Country's ability to produce
to produce specific products specific benefits at a lower
at a lower cost compared to margin and opportunity cost
other countries. compared to other countries.

Basic Concept It deals with lower It deals with the lower

production costs for a margin and opportunity cost
particular benefit compared of a particular benefit
to a competitor country. compared to the competitor
country.
Trade Benefits The notion of absolute In transactions, the two
advantage for both countries countries mutually benefit
involved in trade transactions from each other's
is not always mutually comparative advantage.
beneficial.

Cost of Production Lowering the cost of Lower opportunity cost for

production of a particular the production of specific
benefit compared to products compared to
competitors. competitors.
Production of Goods Countries that have the Countries with comparative
absolute advantage in advantage take into account
producing a good, with the the production of many
same resources available, goods in a country, while
create a greater measure of determining the production
that good. of a particular good and
resource allocation.

Resource Allocation This is not very useful in This takes into account the
determining the resource opportunity cost of
allocation for a country's production, which can be
production because it does very useful in decisions
not take into account the cost about resource allocation,
of production opportunity. domestic production and
import of specific goods.

Benefits of Economics Businesses are not mutually Business decisions based on

beneficial in nature in the comparative advantage are
context of Absolute mutually beneficial in nature.
advantage.

Effectiveness for Economy The concept of is not very This concept can be very
effective because it focuses useful in helping countries to
on increasing production make decisions regarding
with the same resources resource allocation, domestic
available, rather than products and import / export
considering the opportunity of goods.
cost of production.
Table 02- Difference between Absolute Advantage and Comparative Advantage (educba,
2020)

The above table shows the concept both theories relates to economics and commerce, which
enables countries to make logical decisions regarding the allocation of resources for the
production, import and export of goods. The absolute advantage focuses on the marginal cost
of a good product, whereas the comparative advantage focuses specifically on the cost of
opportunity cost. Trade decisions are always mutually beneficial in terms of comparative
advantage between countries. Comparative advantage helps countries in resource allocation
and production to make more effective decisions, so economies are more beneficial to
economies of scale.
Table:3 Empirical Presentation NRCA of Bangladesh
Table: 4 Empirical presentations NRCA of Bhutan
Table: 5 Empirical presentations NRCA of India
Table: 6 Empirical presentation of NRCA of Maldives
Table: 7 Empirical presentation of NRCA of Nepal
Table: 8 Empirical presentation of NRCA of Pakistan
Table: 9 Empirical presentation of NRCA of Sri Lanka
Table: 10 Empirical competitive positions of SAARC Countries

Normalized revealed comparative advantage (NRCA) index by Yu et al. (2009) has a great
significance, due to its dynamic characteristics of over time, cross countries and cross products
comparison in international trade. It also provides comparative picture of degree of advantage
and disadvantage. This is first study that aims at estimating NRCA of SAARC countries at 17-
sectorial level products to reveal their comparative and dynamic positions in international trade.
This study found that Bangladesh has advantages in two sectorial products, Bhutan in two,
India in two, Maldives in three, Nepal in four, Pakistan in four and Sri Lanka has advantages
in three sectorial products. In textile and clothing products, Bangladesh is in better position due
to rising trend in advantage over time, Nepal’s advantage has been volatile, Pakistan’s
advantage is falling, India has volatile in textile and in clothing it is falling. Sri Lankan’s
advantage in clothing is falling while Maldives and Bhutan have no advantage in textile and
clothing products. Bhutan is improving in iron and steel products but in fuel and mining
products its advantage is falling, Maldives with three sectorial products enjoying advantages
but it is falling over time i.e. Agricultural, Food and Fuels products.

In this study, tried to explore empirical findings through the application of NRCA index by
analyzing sectorial level products of SAARC countries. This revealed the comparative position
of competitive sectorial products and provided insight of fluctuations of comparative advantage
over time. On the basis of the estimated NRCA, we can suggest SAARC countries to focus on
their emerging sectors which have potential and their exports in that sectors improving over
time. A matter of concern is falling NRCA in few sectorial products over time indicates poor
performance in these sectors; therefore, these sectors should give attentions.

(Golden Research Thoughts. 2014).

Table 11: The 13 Sector’s contribution to the International Trade.

The 13 sectors of the empirical analysis were selected on the basis that they produce products
that can be traded on the global market. It can assume that for each particular product an
international sector, in which all capitals compete for the expansion of their market share in an
attempt to survive on the world stage, independent of their nationality. The reason is that the
"law of one price" holds true in the international market, as each product is produced in
different countries but faces the same international price. Based on the results of the study of
price deviations, on average, shows the close relationship between direct prices and market
prices and production prices, and can safely use this international social value-direct pricing
(IMP) proxy. we use the share of each country's production for the total output of a particular
sector. It should be noted that in the empirical investigation.
According to the framework of Absolute advantage empirical results show that international
trade does not eliminate productivity and therefore unit cost differences. Empirical analysis
ensures that the full cost benefit of the product is sustained and not converted into comparative
advantage in any way. Empirical results show that all sectors have consistently positive
deviations with International Business Transactions and accordingly international trade is a
mechanism This means that some countries formally enjoy gains, while others still feel the loss
systematically, and in doing so extend the instability of growth. The current analysis goes
against the concept of "International free trade" principles, advocating for harmonious and
mutually beneficial international transactions. In the present study the empirical analysis sheds
some light on the main causes of these inequalities, which must be regarded as the internal
nature of entrepreneurship designed to pursue greater profits, and which defines the terms of
national and international trade within the framework of absolute advantage. According to the
concluding, unequal exchange makes trade rules worse and makes poor countries poorer and
richer. Of course, the analysis must be expanded to include all eurozone economies or other
groups of countries; Nevertheless, the results are not expected to differ statistically significant.

Based on the facts explained above, we can conclude that absolute good and comparative
benefit principles are less appropriate because they both bring together business ideas that focus
on one product and generate new ideas about the product. However, both theories are mostly
irrelevant because they do not consider other important factors, such as the cost of
transportation of merchandise and the dangers of free trade to the economy.

According to the both theories the relationship between international trade and economy,
Exports have an important role in this relation by allowing countries to incorporate
technological advancements and to get access to big and broader markets, that in turn will lead
to a better allocation of resources plus higher productivity gains, which will boost growth, in
addition exports allow a higher accumulation of foreign exchange reserves that can be used to
import high quality inputs. Imports also have an important role since is through them that
technological advancements are embodied in the production of domestic goods, leading to new
products and production standards, that will improve productivity and competitiveness. In this
paper, argued that international trade does not eliminate productivity and therefore unit cost
differences. The empirical analysis confirms that the absolute cost advantage in production
persists and by no means is transformed into comparative advantage.
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