Ricardian Theory

The Asia-Pacific Economic Cooperation was founded in 1989 with the aim to manage the growing interconnection and trade between the 21 members and to improve the economic and political links. The APEC is assisting to reduce the costs of importing and exporting goods between the Asia-Pacific countries. The members of the APEC include Australia, Brunei Darussalam, Canada, Chile, China, Hong Kong-China, Indonesia, Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, Chinese Taipei, Thailand, United States, and Vietnam. Together these nations improve the trade between the Asia-Pacific. China still remains Australia’s biggest trading partner. Since Australia’s trade links with the Asia-Pacific have grown, trade accounts for over 42% of the GDP (compared to only 32% in 1990 when relations with the Asia-Pacific were not as strong). Australian trade policies and agreements are focussed primarily on the Asia-Pacific region as eight of the largest export markets are found there. Australia has realised that the Asia-Pacific region is the most important area for trade as geographically it is close and it holds manufactured goods that Australia needs. Members of the APEC now hold over 70% of Australia’s total exporting and importing of goods and services. The rise of China’s influence on the world due to such advances in technology has influenced Australia to trade more with countries around the Asia-Pacific. Australia’s continued trading with the Asia-Pacific has helped to push Australia’s economic

Nations trade with one another because it is mutually advantageous for both parties when one is more efficient at producing a certain good and at a lower cost, and the other is proficient at producing a different good or service more efficiently. This is based on Ricaro’s theory of comparative advantage.

Australia’s trading links with other countries, specifically the Asia-Pacific region, has led to its advancing development in the modern world. Australia has always had strong trading links with the world and relies heavily on imports and exports. Australia Imports products such as petroleum and cars from other countries primarily China, The United States and Japan.

Australia mostly imports products such as vehicles, machinery, oil, electrical components, pharmaceuticals, medical apparatus, gems and precious stones, plastics and furniture respectively because these products are cheaper to import than to produce domestically due to the high labour costs. Australia’s top 10 imports account for 64.7% of the nation’s total imports. Australia mainly exports crude oil and minerals in raw form because they do not have refineries and smelting plants mainly due to environmental issues. As a result, these go out in raw form and are imported as finish products. This is because natural resources are in great abundance in Australia. Products such as gold, coal and steel are exported to different countries so that they can use them in the manufacturing of certain products, which are then imported to Australia as finished products. Australia’s top 10 exports account for 77.7% of the nation’s total

Australia has an open market which allows for a greater channel of products to sell to the country’s economy, leading to more profit to be generated if the company expands to Australia. Imports for Australia average higher than exports, with “198.5 billion being from imports and 191.5 billion being from exports” (CIA, 2017). Many exports that generate to Australia include: “coal, alumina, wheat, machinery and transport equipment and iron” (CIA, 2017).

One possible limitation is how these theories make their measurements and assumptions based on the boundaries of the country. While it may be fine with small countries, there will be a wider spectrum the larger the country is. This results in a greater likelihood of the problem of preconceived notions as mentioned earlier. Born out of good intentions, the act of

Australian imports and exports are traded in a high volume. Australia 's top five imports in 2014 were oil ($36.8 billion, 16.1%), machines ($33.8 billion, 14.8%), vehicles ($26.2 billion, 11.4%), electronics ($22.2 billion, 9.7%), and pharmaceuticals ($8.5 billion, 3.7%). Australia 's top exports, in 2014 were ores, slag and ash ($82.8 billion, 32.8%), oil, ($65.2 billion, 25.8%), gems, precious metals and coins ($14 billion, 5.6%), meats, ($10.5 billion, 4.1%), and cereals, ($7.5 billion, 3%).

Since the mid-20th century, countries have progressively reduced barriers, subsidies to domestic industries and diverse restrictions on international commerce in order to promote specialization and greater efficiency in production. In theory, free trade allows nations to focus on their main comparative advantages and profit from cooperation and voluntary trade. This strategy is usually reinforced by treaties between two or more countries where commerce of goods and services can be handled across their common borders, without tariffs and other trade obstacles. As a key component of regional integration in the Americas, CAFTA-DR is one important example of this economic ideology.

72% of Australia’s two-way trade is within the APEC countries. Like the G20, this trade relationship is quite significant. Australia’s single top import is personal travel services, however overall most of what Australia imports is petroleum products and motor vehicles. It’s appetite for refined petroleum increased by 12% over the past 5 years. Australia’s top exports are its natural resources, iron ores, coal and natural gas. (Australian Government: Department of Foreign Affairs and Trade, 2014)

Asia. Over the past 50 years, Australia’s trade with Asia as a share of our total trade

However, it was apparent to economists that nations with similar resource endowments exchanged similar products with each other. Economists felt that trade explained solely by comparative advantage was an incomplete analysis of international trade. Furthermore, since the classical trade theory was unable to explain intraindustry trade, economists decided to expand on the classical trade theory by creating a new theory of trade (Carbaugh, 2011). The new theory states that economies of scale provide incentive for a country to specialize in a particular product (Carbaugh, 2011). Furthermore, based on economies of scale, nations with similar factor endowments will trade with each other as sometimes it is beneficial (Carbaugh, 2011). Arguments stemming from this new trade theory puts the economic case for free trade in doubt.

In short, over the last half century Australia's exports have shifted from predominantly agricultural products to minerals, while its trade partners have shifted from Europe to Asia. The U.S. remains Australia's largest source of imports and (after Japan) its second largest export customer. Those shifts in trade patterns have been accompanied by shifts in immigration.

There has been an increase in imports of Australia from 28595 AUD million in January 2015 to 29129 AUD million in February 2015. The commodities which are included in imports are machinery and transport equipment which is followed by telecommunication and office equipment.

Ricardo 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.

This theory is of the view that ‘bit by bit’ investment programmed will not lead to the path of economic development, rather through investing a specific amount can help in economic development.