24-29/01/2011

Specialization: can be further explained through the Theory of Absolute Advantage (Smith) and the Theory of Comparative Advantage (Ricardo).

Absolute Advantage: Explains the rationale for specialization when countries are more efficient in the production of a particular good/service.

Comparative Advantage: Shows that countries can still engage in international trade in the absence of Absolute Advantage as the theory of Comparative Advantage is concerned with the opportunity cost in the production of good/service.

Both Theories nevertheless converge on the virtues of International Trade buttressed through cooperation, as they show that resources are better utilized and with this better allocation of resources, the living standards of the citizens would improve.

In our contemporary case study of the 30GB iPod, the assembly of the iPod takes place in China as the opportunity cost for US is higher, and when the labour intensive activity takes place in China, the production cost of the iPod is lowered. From a consumer's viewpoint, when the cost of production is lowered, the high-tech product is made available to a wider consumer base. But does it really improve the quality of life?