Comparative Importance In International Trade

According to Colander, "The reason two countries trade is that trade can make both countries better off" (2004, p. 416). In economics, the theory of comparative advantage clarifies why it can be advantageous for two countries to trade, even though one of them may be able to produce every kind of item more cheaply than the other. What matters is not the absolute cost of production, but instead, the ratio between how easily the two countries can produce different kinds of goods. The basic idea of the principle of comparative advantage is that as long as the relative opportunity costs of producing goods differ among countries, then there are potential gains from trade.

If each country specializes in areas where its advantages are greatest or disadvantages are least, the gains from trade will make each country better off than it would be if it remained self-sufficient. [3]

1. Country A is extremely efficient in the mining of tin. However, its climate and terrain makes it difficult to produce corn. According to the theory of comparative advantage, Country A should:

Dave gives “The Theory of Comparative Advantage” a different name and calls it “The Roundabout Way to Wealth”.(p.10) He says that this theory deals with the idea that even a nation which is relatively poor at doing everything, still do some things relatively well. “And a nation that is really good at many things should still specialize in producing some items and import the rest”.(p.10) Time is the ultimate scarce resource. Investing time in doing something means having less time in doing

Define the concept of comparative advantage. How can a country gain or lose its comparative advantage in the production of a good?

Due to the differences between the countries in its profitable fundamentals; the International Trade occurs. The contracts between the countries consider as the primary driver of the global exchange. These contracts concluded on the basis of the countries beneficial elements and advantages. Each international trade between the countries depends on numerous focal points of this exchange process. The economics and producers effectiveness measured by absolute advantage for these economics/producers. For example; if the producer needs lesser amount of contributions/inputs to provide specific product, then this producer has an absolute advantage in producing

Absolute advantage is the ability to produce more than one product efficiently and at the lowest cost. Comparative advantage is the ability to specialize in producing one product at the lowest cost. Comparative advantage affects trade the most because with specializing in producing one product the companies must trade to receive other products. Comparative advantage also considers the opportunity of cost to produce one product verse the other.

Pretend for a moment that you are much better than your best friend at chopping pineapples and at waxing surfboards for tourists. Economically speaking, you are said to have the absolute advantage over your friend because you are better at both tasks.  An easy way to identify absolute advantage is to see who can produce the most of a good or who can do it in the fastest time as we see in this example.  Absolute advantage is when some individual, group, or country has the ability to produce a product more efficiently than another individual, group, or country.  

Now, say that you and your best friend opened a fruit and surf stand on the local beach. There are two tasks that need to be completed: waxing surfboards for the surfers who stop by and chopping pineapples for a refreshing snack for people at the beach. While you might be better at both jobs, you can still get the work done quicker if you each take on one of the tasks. The question is: who waxes the boards and who chops up the pineapples? Let’s say:

Which is cost difference determines the patterns of international trade. Absolute advantage is trade benefits when each country is at least cost producer of one of the goods being traded. In the 1800s, David Ricardo developed the theory of comparative advantage to measure gains from trades. This theory is based on comparative advantage and it states each nation should specialize in production of those goods for which its relatively more efficient with a lower opportunity cost.

The country can maximize their wealth by putting the resources in the most competitive industries. Government created comparative advantage rather than free trade because now easier moves the production processes and the machines into countries that can produce more goods (Yeager & Tuereck, 1984). However, many countries now move to new trade theory suggests the ability firms to limit the number of competitors associated with economic scale (reduction of costs with a large scale of output) (Krugman, 1992). The comparative advantage occurs when two-way trade in identical products, it will useful where economic scale is important, but it will create problem with this model. As a result, government must intervene in international trade for protection to domestic firms (Krugman, 1990)

Being the world 's largest economy, the United States is also largest exporter and importer of goods and services. American economic growth relies heavily on trade. According to a recent report on NAFTA, “Since 1992, nearly 20 million new jobs have been created in the U.S., in part due to the 1994 NAFTA agreement. Total trade between the NAFTA partners -- the U.S., Canada, and Mexico -- rose from $293 billion in 1993 to more than $475 billion in 1997, and has increased since. ” (Bowman, Free Trade). It is obvious evidence that international trade is beneficial to the US economy, at least in the 1990s.

2. Assume some guy named Spano and a woman named Bagley are stranded on an island. Two tasks must be

A country is said to be more productive than another country, if it can produce more output (goods) for a given quantity of input, such as labour or energy inputs. An example is that there are only two countries, Australia and Japan. They both produce computers and wine, and only one factor of production, labour. Japan produces 6 computers for every 1 bottle of wine, where as Australia produces only 4 computers for every 3 bottles of wine. This suggests that Australia should export some of its wine to Japan, and Japan should export some of its computers to Australia. Australia has an absolute advantage over Japan, when producing wine, and Japan has an absolute advantage over Australia, when producing computers (Gandolfo, 1998).

Considering that absolute advantage is determined by the comparison between the productivities of labor, it is therefore possible that one party can be disadvantaged to have no absolute advantage in anything. In such a case, it is normally realized that no trade can occur between such a party and other parties. Absolute advantage is normally contrasted with the theory of comparative advantage which means that one party has the ability to produce a particular good or service cheaply or at a lower opportunity cost. In any case, the two theories rely on the basic concept of economic advantage which refers to the ability of one group or party to realize the same output with more economy than another party.

Comparative advantage is a principle developed by David Ricardo in the early 19th century to explain the benefits of mutual trade (Carbaugh, 2008). Many underlying assumptions of comparative advantage depend on states of economic equilibrium and an absence of economy of scale. In reality, economies are dynamic and subject to innovation and interference; which has led to revised assumptions of return and competition (Krugman, 1987). These factors have created questions of free trade and governmental participation in an economy by the development of strategic trade policies. These new concepts do not replace the theory of comparative advantage; however, they further explain how trade can benefit a country's economy (Krugman, 1987).