QUESTION

Explain in detail the Theory of Comparative Advantage and link it with an example of how it
has benefitted two countries who trade with each other.

Note: You must choose a developed country in Europe and a developing country from the
rest of the world and offer at least one product from each country that they offer to trade with
each other. Mention the benefits to each country for this trade relationship, and any
drawbacks or possible future drawbacks as well.

Length of answer: maximum of 600 words.

Reference guide: At least 3 references.

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ANSWER

1. THEORY OF COMPARATIVE ADVANTAGE

Hayes (2024) attributes the development of the concept of comparative advantage to David
Ricardo, a political economist, describing it as a fundamental principle in international trade.
Comparative advantage, as outlined by Hayes, underscores the benefits of free trade among
nations. This concept suggests that trade can still be advantageous for both parties involved,
even when one nation clearly outperforms the other in the production of goods. Businesses
can leverage their comparative advantage to explore new markets and drive economic
growth. Additionally, Daniels, Radebaugh, Sullivan, and Click (2022) argue that gains from
trade persist even in scenarios where a country holds an absolute advantage across all
products, as it can allocate resources more efficiently by focusing on its strengths.

2. HOW HAS COMPARATIVE ADVANTAGE BENEFITTED TWO COUNTRIES WITH A

TRADE RELATIONSHIP?
The selected developed country in Europe is Netherlands, and the selected developing
country is India based in Asia.

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India-Netherlands Trade
According to the India Brand Equity Foundation (2024) India and the Netherlands established
diplomatic relations in 1947. Extensive reciprocal interactions have fueled the diverse
collaboration between the two nations.

Major Exported items from India to the Netherlands

Primary exports from India to the Netherlands encompass petroleum products,
telecommunications equipment, aluminium and its derivatives, organic chemicals,
pharmaceutical formulations, and biological products (India Brand Equity Foundation, 2024).

Major Imported items by India from the Netherlands

India's main imports from the Netherlands consist of crude petroleum, vegetable oils, iron and
steel, plastic raw materials, organic chemicals, industrial machinery for dairy, medical and
scientific instruments, and electrical machinery (India Brand Equity Foundation, 2024).

Seth and Mishra (2022) state that following the conflict in Ukraine, India has continued to
purchase cheap crude oil from Russia, which is under sanctions. With 23 refineries and an
installed capacity of around 250 million tonnes annually, India is a major refining hub in Asia
thus giving it a comparative advantage over Netherlands.

3. BENEFITS OF THE TRADE RELATIONSHIP

3.1 Benefits to the Netherlands

Through trade with India, the Netherlands gains access to a wide range of goods, including
petroleum products, telecom instruments, aluminium products, organic chemicals, and more.
This diversification allows Dutch businesses to meet the demands of their domestic market
more efficiently and potentially at lower costs.

3.2 Benefits to India

India benefits from exporting various goods to the Netherlands, including petroleum products,
telecom instruments, aluminium products, organic chemicals, and drug formulations. These
exports contribute to India's economic growth, generate revenue, and create employment
opportunities.

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4. POSSIBLE FUTURE DRAWBACKS

4.1 Possible future drawbacks for the Netherlands

Over-reliance on any single source for essential resources like oil could pose risks to the
Dutch economy in case of geopolitical tensions or market instability.

4.2 Possible future drawbacks for India

While India's comparative advantage in refining crude oil provides opportunities for exporting
petroleum products, it also exposes the country to volatility in the global oil market.
Fluctuations in oil prices or disruptions in the supply chain could impact India's refining
industry and overall economic stability.

5. CONCLUSION
Undeniably, ongoing collaboration in various domains has bolstered ties between the
Netherlands and India. They persist in collaborating across trade and economic realms,
energy transition initiatives, smart city development and urban mobility, scientific and
technological cooperation, agricultural practices and water management, public health
initiatives, healthcare, and cultural endeavours. They are also growing stronger in their ability
to work together to address global concerns.

WORD COUNT:
564

REFERENCES:
Daniels, J.D., Radebaugh, L.H., Sullivan, D.P. and Click, R.W. 2022. International Business:
Environments & Operations. 17th edition. United States: Pearson Education Limited.
Hayes, A. 2024. What Is Comparative Advantage?. Available:
https://www.investopedia.com/terms/c/comparativeadvantage.asp (Accessed 27 April
2024).
India Brand Equity Foundation (IBEF), 2024. India Netherlands Trade. Available:
https://www.ibef.org/indian-exports/india-netherlands-trade (Accessed 26 April 2024).
Seth, D., and Mishra, R.D., 2022. Netherlands turns top buyer of Indian petro-products amid
Ukraine war. Mint (livemint.com). Available:
https://www.livemint.com/industry/energy/netherlands-turns-top-buyer-of-indian-petro-
products-amid-ukraine-war-11667761912126.html (Accessed 26 April 2024).
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