This economics paper explains how the United States of America’s (USA) economy
benefits from specialisation and exchange.
A country has a comparative advantage in producing a good if it has a lower opportunity cost of producing that good as compared to another country. According to David Ricardo’s law of comparative advantage, the USA will specialise in the production of goods in which it has a comparative advantage in, and use it to trade for goods in which it has comparative disadvantage in. International trade refers to the exchange of goods and services across international boundaries. The theory of comparative advantage theorises that trade arises because different countries have different opportunity costs.
By specialising and exporting goods in which the USA has a comparative advantage in while conversely importing goods in which it has a comparative disadvantage in, she would be able to increase her overall consumption of goods and services as compared to the situation under autarky – defined as the situation without trade. Hence, USA citizens would be able to consume beyond their Production Possibilities Curve (PPC) as a result of increased consumption possibilities. According to ‘The World Factbook’, agriculture and services comprise 1.2 and 79.6 percent of USA’s gross domestic product (GDP) in 2014 respectively. Gross domestic product is defined as the total value of final goods and services produced in a country's domestic area over a given period of time, usually a year. A developed country with a strong technological and capital base such as the USA would have a comparative advantage in the production of high-tech and high-value services, such as banking and shipping. In turn for exporting these, it imports goods such as agriculture from other countries which have a comparative advantage in producing agriculture, such as land-abundant Thailand, or a labour-abundant country such as the People's Republic of China which would produce labour-intensive economic products.
Aside from higher consumption possibilities, there exists other benefits to the USA economy arising from international trade. International trade allows for the USA to produce for a larger world market, thus enabling economies of scale to be reaped. Economies of scale refer to the fall in Long Run Average Costs (LRAC) as output increases. Foreign competition also forces domestic producers to innovate, cut costs and improve product quality. A case in point would be the consumer electronics industry – where American multinational technology company Apple has had increased competition from foreign competitors such as rival Samsung. The exploitation of economies of scale and greater competition improves both productive and allocative efficiency, thereby enabling the USA to better utilise scarce resources in maximising its economic welfare.
Opening up to international trade helps the USA attract Foreign Direct Investment (FDI). FDI arguably results in not just technological transfer, but also the transmission of ideas, technical expertise, and managerial skills, all of which are important contributing factors to the USA’s long-run economic growth. According to ‘The World Factbook’, the USA is the largest recipient of Foreign Direct Investment (FDI) in the world, with a total of 2.8 trillion USD in 2013.
Besides attracting FDI, engaging in international trade also facilitates structural economic change. Developing an economic structure that supports the exporting of goods leads to the expansion of services such as shipping, air travel, banking and finance services. The economy would therefore mature and develop, becoming less dependent on manufacturing, diversifying into higher-value services. This is evident in the USA economy, where the industry sector only comprises 19.2 percent of USA’s GDP, as compared to the service sector which comprises 79.6 percent.
In conclusion, specialisation and international trade brings about many benefits to the USA economy, and are not limited to those listed above.
A country has a comparative advantage in producing a good if it has a lower opportunity cost of producing that good as compared to another country. According to David Ricardo’s law of comparative advantage, the USA will specialise in the production of goods in which it has a comparative advantage in, and use it to trade for goods in which it has comparative disadvantage in. International trade refers to the exchange of goods and services across international boundaries. The theory of comparative advantage theorises that trade arises because different countries have different opportunity costs.
By specialising and exporting goods in which the USA has a comparative advantage in while conversely importing goods in which it has a comparative disadvantage in, she would be able to increase her overall consumption of goods and services as compared to the situation under autarky – defined as the situation without trade. Hence, USA citizens would be able to consume beyond their Production Possibilities Curve (PPC) as a result of increased consumption possibilities. According to ‘The World Factbook’, agriculture and services comprise 1.2 and 79.6 percent of USA’s gross domestic product (GDP) in 2014 respectively. Gross domestic product is defined as the total value of final goods and services produced in a country's domestic area over a given period of time, usually a year. A developed country with a strong technological and capital base such as the USA would have a comparative advantage in the production of high-tech and high-value services, such as banking and shipping. In turn for exporting these, it imports goods such as agriculture from other countries which have a comparative advantage in producing agriculture, such as land-abundant Thailand, or a labour-abundant country such as the People's Republic of China which would produce labour-intensive economic products.
Aside from higher consumption possibilities, there exists other benefits to the USA economy arising from international trade. International trade allows for the USA to produce for a larger world market, thus enabling economies of scale to be reaped. Economies of scale refer to the fall in Long Run Average Costs (LRAC) as output increases. Foreign competition also forces domestic producers to innovate, cut costs and improve product quality. A case in point would be the consumer electronics industry – where American multinational technology company Apple has had increased competition from foreign competitors such as rival Samsung. The exploitation of economies of scale and greater competition improves both productive and allocative efficiency, thereby enabling the USA to better utilise scarce resources in maximising its economic welfare.
Opening up to international trade helps the USA attract Foreign Direct Investment (FDI). FDI arguably results in not just technological transfer, but also the transmission of ideas, technical expertise, and managerial skills, all of which are important contributing factors to the USA’s long-run economic growth. According to ‘The World Factbook’, the USA is the largest recipient of Foreign Direct Investment (FDI) in the world, with a total of 2.8 trillion USD in 2013.
Besides attracting FDI, engaging in international trade also facilitates structural economic change. Developing an economic structure that supports the exporting of goods leads to the expansion of services such as shipping, air travel, banking and finance services. The economy would therefore mature and develop, becoming less dependent on manufacturing, diversifying into higher-value services. This is evident in the USA economy, where the industry sector only comprises 19.2 percent of USA’s GDP, as compared to the service sector which comprises 79.6 percent.
In conclusion, specialisation and international trade brings about many benefits to the USA economy, and are not limited to those listed above.
JC Economics Essays - This is a model H1/H2 A level
Economics essay for a part (a) question of 10 marks. This economics response
was kindly contributed by Wilson YWS, a former economics student, and (after
editing by an experienced economics tutor) is generally quite well written,
especially for a 10 mark question under examination conditions. We can look forward to more H1 economics or H2 economics essays from Wilson in the future.
However, how
can this economics essay be even better written? What other salient points
should have gone into the construction of this essay, and what economics
diagrams would have been drawn to give this economics essay an even better
mark? Also, conversely, what did this economics student include that was good to have but not really necessary? Do always think through the essays that you write and seek to do better each and every time.
Thank you for reading, and cheers.
