Comparative Advantage

Question one – Comparative Advantage

Comparative advantage is an economic theory rooted in the Ricardian economics. The theory opines that, a country has a comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost. The theory offers the most compelling reason for international trade. According to the theory, nations go to international trade because they have superior productivity in an area of industry, and thus they should produce and exports goods for which they have a comparative advantage and import others which other nations have a comparative advantage for. This is the theory that informed the trade agreement amongst China and the Association of Southeast Asian nations.

January 1, 2010 ushered in a new era of free trade area between china and the ASEAN.

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On the other hand, the competition of steel products between china and Indonesia seems not to be in terms comparative advantage. In the year 2010, Indonesia threatened to impose an anti-dumping duty on steel from China to protect its industry (The Chinas Post).

Comparative Advantage

However Indonesia can have a comparative advantage if it improved on technology and economies of scale. With the vast china’s market, Indonesia can be able to raise its economy of scale and thus lower its price in order to capture the huge china’s market (The Chinas Post). Again, if Indonesia was to utilize its locally available iron war, it could have a comparative advantage over china which is hungry fro resources (Yulisman). By utilizing the locally available resources it could mean that Indonesia could reduce its production cost compared to china which has to import raw materials to supply its ever expanding steel industry.

Works cited

Chowdhury, Neel. Free Trade With China: ASEAN Winners and Losers. Web. January 26, 2010. Web. October 28, 2011.

Gooch, Liz. In Southeast Asia, Unease over Free Trade Zones.  The New York Times. Web. December 28, 2009. Web. October 28, 2011.

The China Post. Indonesia May Impose Anti-dumping Duties on Steel. Web. May 26, 2010. Web. October 28, 2011.

Yulisman, Linda. Chinese Steel Threatens Indonesian Made Products.  Asian News Network. Web. July 28, 2011.  Web. October 28, 2011.