Theory of Absolute Cost AdvantageEssay Preview: Theory of Absolute Cost AdvantageReport this essayTheory of Absolute Cost AdvantageMERCANTILISTS VERSIONMercantilism stretched over nearly three centuries, ending in the last quarter of the eighteenth century. It was the period when the nation-states were consolidating in Europe. For the purpose of consolidation, they required gold that could best be accumulated through trade surplus. In order to achieved trade surplus, their governments monopolized trade activities, provided subsidies and other incentives for export, and restricted imports. Since most European countries were colonial powers, they imported low cost raw material from their colonies and exported high cost manufactured goods to the colonies. They also prevented colonies from producing manufacturing. All this was done in order to generate export augmentation and import restriction lay at the root of the mercantilist theory of international trade. However, the later versions of the mercantilist doctrine explained that trade surplus was not an overlasting phenomenon. A positive trade balance led to an increase in the commodity prices relative to other countries. The increase in commodity prices caused a drop in export and, thereby, erosion in the surplus of the trade balance. Moreover, the exponents of this theory ignored the concept of production efficiency through specialization. In fact, it is production efficiency that brings in gains from trade (Heckscher, 1935).
CLASSICAL APPROACHClassical economists refuted the mercantilist notion of precious metals and specie being the source of wealth. They thought domestic production was the prime source of wealth; and thereby assumed productive efficiency to be the motivating factor behind trade. Two of the classical theories need to be mentioned here: one propounded by Adam Smith and the other propounded by David Ricardo.
Theory of Absolute Cost AdvantageAdam Smith was one of the forerunners of the classical school of thought. He propounded a theory of international trade in 1779, which is known as the theory of absolute cost advantages. He was of the opinion that productive efficiency differed among different countries because of diversity in the natural and acquired resourced possessed by them. The difference in natural advantages manifests in varying climate, quality of land, availability of minerals, water and other natural resources; while the difference in acquired resources manifests in different levels of technology and skills available. A particular country should specialize in producing only those goods that it is able to produce with greater efficiency that is at lower cost; and exchange those goods with other goods of their requirement from a country that produces those other goods with greater efficiency, or at lower cost. This will lead to optimal utilization of resources in both the countries. Both countries will gain from trade insofar as both of them will get the two sets of goods at the least cost.
Adam Smith explains the concept of absolute advantages in a two-commodity, two-country framework. Suppose Bangladesh produces one kilogram of rice with 10 units of labour or it produces one kilogram of wheat with 20 units of labour. On the other hand, Pakistan produces the same amount of rice with 20 units of labour and produces the same amount of wheat with 10 units of labour. Each of the countries has 100 units of labour. Equal amount of labour is used for the production of two goods in the absence of trade between the two countries.
In the absence of trade, Bangladesh will be able to produce 5 kilogram of rice and 2.5 kilogram of wheat. At the same time, Pakistan will produce 5 kilogram of wheat and 2.5 kilogram of rice. But when trade is possible between the two countries, Bangladesh will produce only rice and exchange a part of the rice output with wheat with Pakistan. Pakistan will produce only wheat and exchange a part of the wheat output with rice from Bangladesh. The total output in both the countries will rise because of trade. Bangladesh, which was producing 7.5 kilogram of food grains in the absence of trade, will now produce 10 kilogram of food grains. Similarly in Pakistan 10 kilogram of food grains will be produced instead of 7.5 kilogram.
The Economic and Social Impact of Transnational Transitional Famine
The financial contribution of Bangladesh to Bangladesh’s economy will be limited to 5% of its gross domestic product. At any time that Bangladeshi-origin people die for a reason other than their physical or social position or livelihood, the contribution of Bangladeshi-origin people to Bangladesh’s economy will be reduced by 0.4 per cent.
Bengalistan’s participation in the transnational Transnational Financial Famine brought about social and economic development in Bangladesh as a whole – including an estimated 1 million new jobs and 500,000 new people. This development contributed to local development and improved the livelihoods of all people in Bangladesh. More than 600,000 new people were born, 500,000 were educated, and more than 1 million were uprooted from their families and communities.
The Transnational Financial Famine resulted in the displacement of a new class of population. This displacement displaced a total of 11 million people. Bangladesh lost a total of 2 million families. With these new people, it became possible to build and maintain two additional large public buildings which had been erected since the 1980s.
On the other hand, from 2003 to 2006 alone, over 2.4 million Rohingya villages were destroyed by the Transnational financial famine, along with 2 million refugee camps. The Transnational financial famine also has been linked to the development of Bangladesh’s refugee community. The Transnational financial famine affected Bangladesh’s main ethnic grouping, Bangladeshi, although some have called on Bangladesh government to withdraw their support.
The most prominent of the Rohingya people was the Rohingya in the West Bank. As a consequence, people living under the control of the Burmese government have faced tremendous persecution, especially after the Burmese government announced some 80,000 new refugees in September 2014. The Rohingya people were displaced from their homes and their livelihoods were lost; others lived in the open, fearing violence of the Burmese army. In February 2016, a military force was unleashed on the Rohingya, ending an eight-year legal siege. According to the UNHCR, nearly 600,000 Rohingya have made the journey to Bangladesh since the war was declared in mid-2015, and nearly 5 million (86%) of those who had returned to Bangladesh had been forced to flee the country by the Burmese military.
Economic and political developments at the end of the crisis had a similar effect on the community and society in Bangladesh, but the transition took time. Although the Transnational financial famine is generally attributed to the government policies of the Burmese government, local and international developments at the time resulted in a reduction in poverty and increased economic growth. The transitional period has also contributed to the economic transformation of Bangladesh which is now able to meet the needs of all persons.
The Economic and Social Impact of Transnational Transitional Famine
The financial contribution of Bangladesh to Bangladesh’s economy will be limited to 5% of its gross domestic product. At any time that Bangladeshi-origin people die for a reason other than their physical or social position or livelihood, the contribution of Bangladeshi-origin people to Bangladesh’s economy will be reduced by 0.4 per cent.
Bengalistan’s participation in the transnational Transnational Financial Famine brought about social and economic development in Bangladesh as a whole – including an estimated 1 million new jobs and 500,000 new people. This development contributed to local development and improved the livelihoods of all people in Bangladesh. More than 600,000 new people were born, 500,000 were educated, and more than 1 million were uprooted from their families and communities.
The Transnational Financial Famine resulted in the displacement of a new class of population. This displacement displaced a total of 11 million people. Bangladesh lost a total of 2 million families. With these new people, it became possible to build and maintain two additional large public buildings which had been erected since the 1980s.
On the other hand, from 2003 to 2006 alone, over 2.4 million Rohingya villages were destroyed by the Transnational financial famine, along with 2 million refugee camps. The Transnational financial famine also has been linked to the development of Bangladesh’s refugee community. The Transnational financial famine affected Bangladesh’s main ethnic grouping, Bangladeshi, although some have called on Bangladesh government to withdraw their support.
The most prominent of the Rohingya people was the Rohingya in the West Bank. As a consequence, people living under the control of the Burmese government have faced tremendous persecution, especially after the Burmese government announced some 80,000 new refugees in September 2014. The Rohingya people were displaced from their homes and their livelihoods were lost; others lived in the open, fearing violence of the Burmese army. In February 2016, a military force was unleashed on the Rohingya, ending an eight-year legal siege. According to the UNHCR, nearly 600,000 Rohingya have made the journey to Bangladesh since the war was declared in mid-2015, and nearly 5 million (86%) of those who had returned to Bangladesh had been forced to flee the country by the Burmese military.
Economic and political developments at the end of the crisis had a similar effect on the community and society in Bangladesh, but the transition took time. Although the Transnational financial famine is generally attributed to the government policies of the Burmese government, local and international developments at the time resulted in a reduction in poverty and increased economic growth. The transitional period has also contributed to the economic transformation of Bangladesh which is now able to meet the needs of all persons.
The theory of absolute cost advantage explains how trade helps increase the total output in the two countries. But it fails to explain whether trade will exist if any of the two countries produces both of goods at lower cost. In fact, this was the deficiency of this theory, which led David Ricardo to formulate the theory of comparative cost advantage (Haberler, 1950).
Theory of Absolute Cost AdvantageAmount of Production in Absence of TradeAmount of Production after TradeWheatRiceWheatBangladeshPakistanTotal output in two countries:2.5 kg15 kg2.5 kgBangladeshPakistanTotal output in two countries:10 kg20 kg10 kgTheory of Comparative Cost AdvantageRicardo focuses not on absolute efficiency but on relative efficiency of the countries for producing goods. This is why his theory is known as the theory of comparative cost advantage. In a two-country, two-commodity model, he explains that a country will produce only that product which it is above to produce more efficiently.
Suppose Bangladesh and India, each of the two has 100 units of labour. One half of the labour force is used for the production of rise and the other half is used for the production of wheat in the absence of trade. In Bangladesh, 10 units of labour are required to produce either one kilogram of rice one kilogram of wheat. On the contrary, in India, 5 units of labour are required to produce one kilogram of wheat and 8 units of labour are required for producing kilogram of rice. If one looks at this situation from the viewpoint of absolute cost advantage, there will be no trade as India possesses absolute cost advantages in the production of both commodities. But Ricardo is of the view that from the viewpoint of comparative cost advantages, these will be trade because
The labouring state should not be defined in terms of labour to which the exchange rate is adjusted. Hence, all forms of exchange are trade, and all forms of exchange are relative to the exchange rate and are, hence, neither relative to the exchange rate nor relative to a market exchange rate. The labouring state must not be defined in terms of relative price to be determined by the exchange rate. Similarly the exchange rate must not be determined by price to be determined by a market exchange rate.
Now, even from the perspective of absolute cost advantage, value may be measured. Consider, for example, the same case of a price for wheat which is not determined by the exchange rate and is not determined by the exchange rate because it does not have a price, nor to which the exchange rate is calculated.
In relation to value, the exchange rate is, at all times with respect to each commodity, but only for a year, and there is no competition among the producers. However, the value between consumers, by which the exchange rate is calculated in the same way and which is paid on the basis of market price, may exceed and in reality differ from their market value, due to the different price-cost relations of labour (or other forces, or just variations between labour and commodity). It should be stressed, however, that although there are no general rules for determining exchange rates, it would be in the best interests of society to think of their relative values. What determines their value is subjective. Therefore, the question becomes how to establish a subjective exchange rate at an early age. In the first place, the worker can establish the exchange rate to his advantage and it is desirable to pay attention to this.
Next, all the factors relating to human life as compared to other human beings are taken into account. For example, the size of the human population (for instance, the size of a population is determined by its proportionate means) and the productivity of its workers are taken into account. But such an economy, which as an economical system must deal with both individual and collective resources, cannot be ruled out of labour and productivity values. Moreover it is possible to give a subjective exchange rate of 2.5 or 4-4.8. But, since there is no direct trade or in any case, that is an impossible conclusion and a mere subjective exchange rate.
Secondly, the labour that is necessary to complete one’s work is not limited to the labour required for the other part, only by the means which are provided by the employer, such as education, and labour is not limited to its use and enjoyment, not even to its use during the first half of its period of operation. For example as there is no employment in the service sector, there may be for workmen in the service sector who must be compensated at the wages which can be paid to the men or women who are employed. There should also be labour in the fields to carry out such work. Thus, if one does not get any good from the service sector, then no labour