International Trade and Open Economy | Assignment

Running head: INTERNATIONAL TRADE AND OPEN ECONOMY
INTERNATIONAL TRADE AND OPEN ECONOMY
Name of Student:
Name of University:
Author Note:

1
INTERNATIONAL TRADE AND OPEN ECONOMY
Introduction
International trade is one of the most important parameters for economic growth. The
theory of comparative advantage forms the basis of international trade which describes that
countries take part in international trade and export goods in which they have a relative
comparative advantage in production. The theory has been proposed by David Ricardo in 1817
that incorporates the concept of opportunity cost (Mankiw 2016). Comparative advantage is
gained when economies are able to produce goods by using fewer resources at lower opportunity
costs. International trade has a pivotal role in the generation of economic profits in United
Kingdom due to a gain in comparative advantage in production.
UK is one of the most globalized economies in the world which is highly developed and
market oriented. The economy is renowned as one of the top exporters of goods and services in
the world and ranks among the top five importers. More than half of imports and exports of UK
are engaged with European Union which serves as one of the most efficient trade partner (Curtis
2018). Therefore, it is important to evaluate the structure of international trade with respect to
comparative advantage that enables the export of goods and services in UK.
Discussion
The trade to GDP value generates about half of country’s GDP. The volume of
international trade has significantly improved in the past few years. UK exports several goods in
the international markets (Geels et al. 2016). The goods that are exported by UK are automobiles
turbo jets, computers cars, mechanical machinery, aircraft, miscellaneous manufacturers, medical
or pharmaceutical products, financial services respectively. About one-tenth of food items and
related stuffs are imported from other economies. Machinery and transport equipment are also

2
INTERNATIONAL TRADE AND OPEN ECONOMY
imported that serves as one-tenth of the total imports. The UK market is highly dominated by
service sectors that generates over 80- percent of the total GDP including the value of both
imports and exports respectively.
Structure of UK economy with respect to international trade
The financial service sector is another sector in which the economy has a comparative
advantage. London has one of the biggest financial centers in the world that provides financial
services to several companies. Another big industries in UK are aerospace and pharmaceutical
industry that gives them a comparative advantage in production. The economy has more than
164.2 billion dollars in foreign reserves and generates more than 1.04 trillion dollars. UK is
ranked as the sixth largest economy in terms of Gross National Product. The economy ranked
22nd in terms if per capita GDP that comprise of 3.3 percent of the world’s GDP (Browne and
Immervoll 2017). It has a well-structured trade system that is effectively run and managed by
effective production techniques that has enabled them to gain a level of comparative advantage
in production.
The role is to change the way goods are being produced and served in the economy with
respect to change in overall aggregate market effect and outcomes as per the structure of
international trade. The trading system of UK is organized in a manner that effectively improves
the performance of other economies. UK has actively understood its areas of comparative
advantage and traded with economies for goods in which it has a comparative advantage in
production (Dhingra et al. 2016). In order to understand the effectiveness of comparative
advantage in international trade, it is important to get acquainted with the trade theories for an
effective analysis of trade structure of United Kingdom.

3
INTERNATIONAL TRADE AND OPEN ECONOMY
Theory of comparative advantage
Comparative advantage allows an economy to sell goods at low price and attract huge
sales in the international markets. Comparative advantage is a fundamental tool used in
international trade such that all economies can benefit from voluntary trade and cooperation. The
theory is closely related to opportunity costs where opportunity cost is defined as the cost of the
next best alternative. It is the value of potential benefit that economies or individuals tend to miss
out while choosing one good over another (Witt and Jackson 2016). Trade or export of goods is
beneficial only if it is produced at lower cost by using few resources, capital, advanced
technology, skilled labor, capital and labor intensive approaches (Watson 2017). This approach
affectively leads to the theory of specialization. The company with lower opportunity cost can
sell goods at lower price that will effectively improve the level of exports and demand for the
product.
Figure 1: Trend in the goods trade balance of UK in the past five years