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Three sources of comparative advantage for Kuwait

Discuss about the Environmental and Economic Implications.

In the economic context the theory of comparative advantage is concerned with the gains derived from the trade for an individuals, countries or firms which arises from the differences in their factor endowments and technological progress. Under the economic framework, economic models usually possess comparative advantage over the other in terms of producing a specific good unless they are able to produce the goods at relatively lower price. Producing goods at relatively lower cost leads to opportunity cost or reduced amount of marginal cost before the commencement of trade.

Under the comparative advantage one does not takes into the consideration the monetary cost involved in production or the amount of resources used in production. Instead, individuals consider the opportunity cost of while manufacturing goods around the nations. The “law of comparative advantage” states that under the free trade agents will manufacture more quantity of goods and consume fewer amounts of goods, that provides them with comparative advantage. The concept of “Comparative advantage” states that a nation can maximise its wealth by putting into the use its resources in highly competitive industries irrespective of whether other nations are more competitive in those industries (Bahar, Hausmann and Hidalgo 2014). This concept is known as law of comparative advantage.

David Ricardo created a theory named comparative advantage during the year 1817 in order to explain the reason behind countries engaging in the international trade even though the workers of a country is efficient at producing every given item of goods than the other country (Costinot and Donaldson 2012). In his theory he established that if a nation is competent enough of manufacturing two commodities and indulges themselves in a free market then each of the country will maximise its general use through selling overseas the commodities which provides comparative advantage while bring in the other goods. There exists a circumstances that the productivity of labour in both the countries are not similar hence there must be differences in the labour productivity.  The theory is widely regarded as the most useful tools though being a counter initiative tools in economic context. The theory of Ricardo states that comparative advantage is responsible for high volume of international trade instead of absolute advantage.

One of the prime reason for the economic development of Kuwait is the oil and gas sector. Kuwait is considered as one of the world’s 9th largest producers of crude oil. It has nearly 8% of the world’s proven reserves of crude oil and it is ranked at 18th position in the producer of natural gas reserves. The MFN made it applicable in its tariff of 5% on oil, gas and petroleum products. Overseas investors might carry out the economic activities in industries rather than exploring the oil and gas production (Enderwick and Enderwick 2013). The objective of Kuwait is to become a leader in the world market of petrochemical based on its comparative advantage through forming joint ventures with the foreign enterprise.

Challenges facing GCC's transport infrastructure

Increasing returns to scale: Kuwait aims to increase returns when the outputs increase more than in proportion of its inputs. Growing demand in the marketplace where buying and selling forms the basis of imports for Kuwait it helps in increasing specialisation with increased productivity and internal and external economics of large scale. Such long run economies of large scale gives Kuwait with significant amount of advantage in the labour division. Being an economies of scale it carries a large scale production more efficiently than other countries engaged activities small scale production (Phillips and Schweisfurth 2014). This is due to the spreading of fixed cost over large amount of production.

Production of gas: It is evident that Kuwait has large amount of natural gas reserves. Until January 1 2005, it was estimated that Kuwait had around 55.5 trillion cubic feet which also included 0.5 trillion cubic feet in the natural zone as well. This provides Kuwait with comparative advantage in exporting natural gas with the foreign enterprise.

The greatest achievement for GCC in the recent years has been its achievement in invigorating buying and selling with its associate states through the help of custom union and joint marketplace To get this far it has created a positive impact on the mutual trade. It is noteworthy to denote that around $100 billion trade taking place amid its associate states since 2013. The figure is however seven folds higher than that of trading activities taking place in the year 2000. Even though after such a positive-growth mutual trade, still remains to be mere 7.1 per cent of the average overseas operations conducted among the six affiliate states (Feenstra2015).

There are further some noteworthy reasons behind such poor growth in trade among the member states. One of the challenging aspects is that even though it’s been long since the establishment of custom union mutual trade among the GCC member states is still hampered by the prolonged time taking custom process at the broader entrance port. Such hindrance in trade is largely responsible on the land based border crossings.

The crucial element for developing the reciprocated trade is well established transport system that is competent of providing rapid movement of cargo and goods in between different states. An efficient transport network involves the seaports, roads, railways and airports. In accordance with these demands of an efficient transport network, it is clear that GCC does not have good transportation facility, as its road infrastructure is not good enough. The roads of GCC are not properly serviced and maintained. Several road projects are connecting the GCC countries are stuck at the stage of feasibility studies (Salahuddinet al. 2015). These also involve many unfinished designs within it because of which these are not progressing.  In accordance with the previous description one example can be given, interstate railway project was ratified by the Supreme council of GCC and was fixed to be completed within 2018 but this project has not been started yet. A good transportation system will be reducing the transportation cost and will be benefiting the country and in case of GCC, it will provide a stable structure among the common market of GCC.

The region’s construction industry faced some pricing irregularities in the year of 2007, as there were scarcity of key resources (concrete, cinder, blocks and construction steel) (Sebri and Ben-Salha 2014). A good and efficient transport network will be helpful in providing materials to the proper location where the deficiency of materials has been located and it severe effect on the business and projects. In addition to this, this effective transportation will be minimizing the effect of local demands and inflation.

In contrast with this scenario, some admirable steps have been taken in the area of air transport (Nasreen and Anwar 2014). This decision made GCC one of the most effective aviation facility providers in world. According to geographical position of GCC countries, it is clear that, they had one of the most effective refuelling hubs all around the world, which can support transportation measures.

In contrast with the decision taken by GCC about their aviation industry, they have decided to increase number of flights in between their major cities and capitals. This will be letting their state carriers to put up for sale their tickets in a direct way to their collaborative states (Al-mulali and Tang 2013). In addition to this, this will also reduce the utility of local representatives or sponsors. These steps helped to enhance the movement of people as well as this step has provided so many advantages to business within GCC countries.

Reference List:

Al-mulali, U. and Tang, C.F., 2013. Investigating the validity of pollution haven hypothesis in the gulf cooperation council (GCC) countries. Energy Policy, 60, pp.813-819.

Bahar, D., Hausmann, R. and Hidalgo, C.A., 2014. Neighbors and the evolution of the comparative advantage of nations: Evidence of international knowledge diffusion?. Journal of International Economics, 92(1), pp.111-123.

Costinot, A. and Donaldson, D., 2012. Ricardo's theory of comparative advantage: Old idea, new evidence. The American Economic Review, 102(3), pp.453-458.

Cuñat, A. and Melitz, M.J., 2012. Volatility, labor market flexibility, and the pattern of comparative advantage. Journal of the European Economic Association, 10(2), pp.225-254.

Enderwick, P. and Enderwick, P., 2013. Some economics of service-sector multinational enterprises. Multinational Service Firms,(London and New York, NY: Routledge, 1989), pp.3-34.

Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university press.Huxham, C. and Vangen, S., 2013. Managing to collaborate: The theory and practice of collaborative advantage. Routledge.

Hvidt, M., 2013. Economic diversification in GCC countries: Past record and future trends.

Nasreen, S. and Anwar, S., 2014. Causal relationship between trade openness, economic growth and energy consumption: A panel data analysis of Asian countries. Energy Policy, 69, pp.82-91.

Phillips, D. and Schweisfurth, M., 2014. Comparative and international education: An introduction to theory, method, and practice. A&C Black.

Radhi, H., 2012. Trade-off between environmental and economic implications of PV systems integrated into the UAE residential sector. Renewable and Sustainable Energy Reviews, 16(5), pp.2468-2474.

Salahuddin, M., Gow, J. and Ozturk, I., 2015. Is the long-run relationship between economic growth, electricity consumption, carbon dioxide emissions and financial development in Gulf Cooperation Council Countries robust?. Renewable and Sustainable Energy Reviews, 51, pp.317-326.

Sebri, M. and Ben-Salha, O., 2014. On the causal dynamics between economic growth, renewable energy consumption, CO 2 emissions and trade openness: fresh evidence from BRICS countries. Renewable and Sustainable Energy Reviews, 39, pp.14-23.

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