Analyzing Features of the International Economic Environment

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Economics Assignment

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3.1 Analyse features of the international economic environment
The international economic environment is defined as a system that is used globally to carry out
trade among developed as well as developing countries. It is regarded as a subdivision of
economics that deals with environmental problems (Cantwell, Dunning and Lundan, 2010). In
order to analyze features of the international economic environment, it is decisive to provide an
overview about Absolute Advantage, Comparative Advantage, different forms of government
intervention, balance of payments and exchange rates.
Absolute Advantage and Comparative Advantage
The comparative advantage theory by David Ricardo states that a country has a comparative
advantage over a different country when it has the ability to produce a commodity or service at a
lower cost. As a result, the country specialises in the commodity in which the opportunity cost is
low (Cuñat and Melitz, 2012). Specialization that takes place according to comparative
advantage leads to a more competent allocation of global resources.
Figure: Absolute Advantage and Comparative Advantage

John’s PPF
Bread
Butter Butter
Bread
Mary’s PPF
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The first diagram illustrates about absolute advantage that shows that Mary has absolute
advantage in butter whereas, John has absolute advantage in bread. The second diagram shows
that Mary has absolute advantage in butter as well as bread. According to Levchenko and Zhang
(2016), absolute advantage is imperative however, comparative advantage helps to determine
what a country is likely to specialize in. In other words, if country A and country B has been
trading and the opportunity cost of manufacturing a single unit of clothing is equal to 2 units of
food in Country A, but only 0.5 units of food in Country B. In this case, country B will have
comparative advantage in clothing, as the opportunity cost of manufacturing clothes is lower in
country B as compared to country A.
Different Forms of Government Intervention
Governments intervene in markets in order to deal with inefficiency. The intervention takes place
to combat inequalities that take place in diverse forms. The government aims to maximize social
welfare when they intervene in the market. This type of intervention makes sure that all the
resources are not depleted. The intervention also takes place to make sure that damage that is