Production Benefits Of America And Japan's Global Economy

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]

Comparative advantage is the concept that production can be conducted with lower opportunity cost than a competitor. The lower cost of

As most already know, the Swiss are renowned for their production of high quality chocolates including those of the Toblerone and Lindt brands. “Switzerland has a comparative advantage in the production of chocolate. By spending one hour producing two pounds of chocolate, it gives up producing one pound of cheese, whereas, if it spends that hour producing cheese, it gives up two pounds of chocolate. Thus, the good in which comparative advantage is held is the good that the country produces most efficiently (chocolate). Therefore, if given a choice between producing two goods (or services), a country will make the most efficient use of its resources by producing the good with the lowest opportunity cost, the good in which it holds the comparative advantage, and by trading for the other good.” (Globalization101.org, 2010)

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:

Although the US made many points about trade and how it would benefit Japan, the underlying point was a pure advantage for the US. By opening the ports, the United States would gain access to an intermediate point before reaching mainland Asia for trade. As Fillmore stated, “Commodore Perry is also directed by me to represent to your imperial majesty that we understand there is a great abundance of coal and provisions in the Empire of Japan. Our steamships, in crossing the great ocean, burn a great deal of coal, and it is not convenient to bring it all the way from America. We wish that our steamships and other vessels should be allowed to stop in Japan and supply themselves with coal, provisions, and water.” In a sense, this is a backhanded

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.

While many of the world’s economic powers seem similar, there is no doubt there are some very key differences. Many of these differences can be attributed to cultural differences within each of the countries. While many of these countries work together in global business efforts, cultural differences would certainly have a significant impact on management style, leadership and even work ethic of the employees. The United States and Japan are both strong economic powers that hold to a capitalistic economic system. Their management styles, however, are very different. This can often be explained through the differences in culture and management or leadership styles. Over the years, the two

Economic analysts say trading among other countries with no stipulations improve global efficiency in resource allocation (Tupy, 2005). Free Trade delivers goods and services to those who value them most and allows partners to gain from specializing in the producing those goods and services they do best; according to Tupy’s findings, Economists call that the law of comparative advantage. Tupy also states when producers create goods they are comparatively skilled at i.e. Germans producing beer and the French producing wine, those goods increase in abundance and quality. Trade allows consumers to benefit from more efficient production methods, for example, without large markets for goods and services, large production runs would not be economical. Large production runs, in turn, are instrumental to reducing product costs while lower production

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)

Countries are enabled by free international trade to specialise or to focus in the production of the goods in which they have a comparative advantage. Specialisation countries can take the benefit of efficiencies generated from increased output and economies of trade. The size of the firm’s market are increased by the international trade which results in lower average costs and increasing in productivity, as it ultimately leads to increase in production.

Trade freedom is a highly important factor in determining economic freedom and wealth. No one single country has the resources required to sustain the current standards of living in developed or developing nations. Trade requires specialization according to a country’s comparative advantage. Specialization allows the most efficient and effective use of a country’s scarce resources, whether that be natural resources or labor resources. The Index shows the economic benefits of specialization and trade.

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.

Manufacturing adjusts to meet a constant return on the product (Hunt & Morgan, 1995). Effectively, these theories rely on national monopolistic models to explain comparative advantage (Ossa, n.d.). While the standard of comparative advantage explains why trade can exist between countries, the assumptions do not account for conditions of increasing returns and imperfect competition.