Reveal Comparative Advantage Assignment Help
Introduction
There was a time when firms operated only in the domestic market. At that time, firms used all their factors of production to have an absolute comparative advantage. With internationalization and globalization, firms have expanded beyond domestic boundaries.
Today, firms have shifted their focus from comparative advantage to relative advantage. Large firms have expanded themselves in emerging markets so that they can optimize the cost of production. For example, companies like Apple, Google, etc. have expanded in India and China because India and China offer relative advantages in terms of labour costs and other production inputs (Gokarn, 2003).
This is known as Relative Comparative Advantage. The objective of this paper is to focus on Australia’s relative comparative advantage.
The revealed comparative advantage (RCA) is an index used in international economics to calculate the relative advantage or disadvantage of a certain country in a certain class of goods or services as evidenced by trade flows. The objective of this paper is to perform RCA for Australia with respect to China.
For this research paper, the chosen industry is FMCG (Fast Moving Consumer Goods), and the chosen time period is 5 years (2000 to 2005). The objective of this paper is to discuss the relative comparative advantage of Australia with respect to China in the FMCG industry for a period of 10 years (2000 to 2005).
Analysis
There are lots of theories around international trade that reveal comparative advantage. Most of the theories around revealed comparative advantage would focus on the export and important data between countries. In this way it can be said that revealed comparative advantage is a relative term.
It could be possible that Australia is on the negative side of RCA with respect to the USA and on the positive side of RCA with respect to China (Albaladejo, 2003). The research period for this project is five years, from 2000 to 2005. This period is chosen because 2000 was the time when multinational companies started to expand and enter the Chinese market.
The bilateral trade flow between Australia and China can be shown as:
As can be seen from the above diagram, the trade flow between the two countries increased tremendously post-2000. From 2000 to 2005, the bilateral trade between Australia and India grew, and the same growth rate has continued to date. The revealed comparative advantage between Australia and China can be based on the export and import data.
One theory suggests that a country’s comparative advantage should be based not only on the volume of international trade between two countries but also on the growth of that trade (Eckhard, 2003).
The revealed comparative advantage index is typically based on the ratio of exports and imports. Different RCA indexes could exist for different trade products between Australia and China. To reach any conclusion, it is important to analyze the data of important imports and exports between Australia and China.
The export and important data in the time period of 2000 to 2005 can be shown as:
One of the theories around competitive advantage suggests that countries would export goods and services that use or employ its most abundant resources, and on the other hand, countries would import the product and services that are dependent on resources with scarce resources (John, 2004).
The same applies to bilateral trade between Australia and China. Australia’s export and import strategy is based on the above theory. The government of Australia understands the areas that should be focused on export and the areas that should be focused on import.
RCA and index is a useful index that is being used by the government of Australia and other private entities to develop export-import strategies. In simpler terms, RCA is just an index between the exports and imports.
That is, the RCA is equal to the proportion of the country’s exports that are of the class under consideration (Eij / Eit) divided by the proportion of world exports that are of that class (Enj / Ent).
The discussion around RCA and comparative advantage can be carried out as:
- A comparative advantage is “revealed” if RCA>1. A score of more than 1 would mean Australia has a relative advantage over another country. For example, if for some particular commodities, the export from Australia to China is more than imports, then RCA would be positive and more than 1.
- If RCA is less than unity, the country is said to have a comparative disadvantage in the commodity or industry. For example, if for some particular commodities, the export from Australia to China is less than imports, then RCA could be positive but less than 1. This could be an unfavourable condition for Australia.
The RCA and comparative advantage also have an impact on the balance of trade. One of the objectives of the economic policy of every nation is to have a positive balance of trade. A positive and a value greater than 1 can ensure a positive balance of trade.
Therefore, the target of the Australian government is to have RCA more than 1. As of today Australia is a better position for balance of trade between Australia and China. However, in recent times, China has been successful in increasing its exports to Australia.
This means that Australia’s imports from China are on the rise. The comparative advantage study and its revelation of comparative advantage would also help the Australian government and other policymakers manage the balance of trade between Australia and China.
The study of comparative advantage and its revelations also help policymakers develop foreign policy for Australia. It is important to highlight that one important dimension of any economic change is the political dimension. The
The Australian government has acknowledged that China is a strategic partner for it to conduct business. It is expected that the policies around revealed comparative advantage would be developed to strengthen the ties between both the countries.
It is also important to study comparative advantage and RCA on a global level. At a global level, Australia is a developed nation, and developed nations typically have an RCA value of more than 1. The same can be observed for Australia’s RCA value with respect to developing nations like China.
It is expected that this value would remain more than 1 because China requires more goods and products from Australia. However, China is still dependent on Australia and other developed countries for technological products. The diagram below illustrates the value of the growth in Australian and Chinese imports and exports.
It can be seen from the above chart that the graph of China has witnessed a peak in 2000. From 2000 to 2005, there has been a peak in the exports of China.
That was the time when China’s exports to Australia increased, and as a result, the comparative index was reduced a bit; however, it was still more than 1 (Weiss, 2004).
Conclusion
With the above discussion, comparative analysis and relative comparative index are powerful tools that assist economists and policymakers in developing economic policies. At the macroeconomic level, it is important to understand that RCA and theories around comparative advantage should be studied in association with other theories to gain insight (Siegfried, 2002).
At a microeconomic level, economists could use the revealed comparative index to design Australia’s international trade policies.
The above paper discussed the theory to understand the export-import association between Australia and China and to understand Australia’s comparative advantage with respect to China. Based on the above discussion, Australia has more exports than imports, which has helped it have an index value of more than.
With the above discussions, it can also be said that China has been successful in bringing this value down in recent years. The above paper discussed this index and import exports for the period of 2000 to 2005. It can be said that it was the period when China started to increase its export level. The graphs used above explain that the growth rate of exports from China to Australia was more than the growth rate of imports from Australia and China for the period of 2000 to 2005.
Therefore, it can be said that the revealed comparative index for Australia has reduced in the time period of 2000 to 2005. There could be different reasons for this reduction; the most important reason is the advancements of China during that period. In fact 2000 to 2005 was the period when China started the mass production of goods and when companies started to enter China market using FDI.
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