The Importance Of Trade Around The World

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

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.

Absolute advantage is when a country produces more of a certain good and less of another good using the same amount of resources. Countries that practice this method are able to take advantage of an economic opportunity that allows them to work more efficiently. For example if two countries agree to import/export for maximum output it creates an absolute advantage to both parties. The U.S can produce more wheat than China, and China can turn around and produce more electronics than the U.S. This occurs because electronic products are cheaper and are now manufactured in China. The factories are bigger and work faster in terms of demand than those in the U.S. There are countries with environmental limitations and are not able to produce crops,

When one country is able to be more efficient in producing one good or service compared to a different country, a comparative advantage has occurred. This usually takes place when a country is able to focus and specialize in a product or service so they will have a stronger dominance in what they do. The United States have exceeded in creativity and innovation, which accounts for the advantage in technology (Macroeconomics, 24-38). The U.S. also has a trade surplus in services and is the forerunner in the worlds’ service exports (Global Trade in Services, 84).

Absolute advantage is when a country can make a product more efficiently than any other country. Generally, this means a particular country already has the resources available for immediate or somewhat immediate availability and it does not cost a lot of money, time or resources to make it available for selling.

Absolute advantage is the theory that a nation specializes in something that it is most efficient at producing. Absolute advantage is based on productivity. Nation that can produce a good and require the least quantity of input is considered to have an absolute advantage. On the other, comparative advantage is based on opportunity cost. Even though that nation may not have the absolute advantage, it still can produce the good if it has the lowest opportunity cost as compared to another nation.

Having absolute advantage is the way to go; this is a win, win situation. For a country or company to have absolute advantage is a dream made in heaven. It is like winning a million dollars at poker while betting only five bucks. This is the perfect situation where the production of goods is being produced at a lower cost, but with the same resources. Absolute Advantage can also be achieved by having a higher productivity with fewer labor resources. Ten workers produce the same five high quality cars than 15 workers in an eight hour day; or 15 workers produce the same five high quality cars in four hours.

     There are various trade agreements the United States have with many other countries and I will do a brief overview of a few of them. The most noticeable one is the North American Free Trade Agreement, which include the United States, Mexico, and Canada. This agreement was constructed and approved in January of 1992 and formed the largest free trade area. NAFTA eliminated and reduce tariffs and non-tariff barriers in addition to comprehensive provisions in the way trade was conducted between these countries.

To understand which nation has an advantage over the other concerning each products productivity, we can identify which nation requires the least amount of time to produce each product. Mankiw (2015) explains that the producer requiring fewer inputs holds absolute advantage. By reviewing the production possibilities in Table 1, we can see that absolute advantage does not exist for producing cars, since for each nation one worker takes 0.25 years to produce one car. However, America holds absolute advantage for producing grain, because it only takes 0.1 years for one worker to produce one ton of grain, as opposed to 0.2 years for Japan. While Japan might not hold absolute advantage in our scenario, comparative advantage exists, and we go on to explain why.

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Companies tend to be most competitive when they can benefit from comparative advantage in their country of origin. According to the Heckscher-Ohlin model which incorporates realistic production characteristics into Ricardo’s (1817) theory of comparative advantage, “capital abundant countries will export capital intensive goods.” (Suranovic, 2006)

When one country is more efficient at producing products in a certain industry than another country, it is to their advantage to use international trade. This can raise their standard of living, resulting in more dependable incomes from selling their goods to wealthier countries. In absolute advantage, the country has the advantage of producing goods with the smallest amount of inputs compared to other countries. In these cases the countries should produce goods with the lowest cost of production. However, there are some countries

The theory of comparative advantage implies the importance of trading for other goods with countries that specialize in the producing those goods in areas that are more efficient so that countries can utilize the majority of its resources to gain an absolute advantage. Logitech has benefitted by diversifying its global operations to different countries based on operational and strategic decisions to remain competitive and innovative in the computer industry.

Absolute Advantage is the comparison of productivity of a person, company, or nation to another person, company, or nation and the ability to produce with fewer inputs (what is used to make the product) than another producer. Comparative Advantage is the opportunity costs (what must be given up to obtain an item) between two producers and the ability to produce at lower opportunity costs than another producer. Absolute Advantage can be found in both goods that are produced by an individual, company, or nation, while Comparative Advantage is impossible to be found in both goods that are produced by an individual, company, or nation. Although Absolute Advantage is important in international trade, Comparative Advantage plays a larger part and is a key factor in international trade. N. George Mankiw states, “The principle of comparative advantage states that each good should be produced by the country that has the smaller opportunity cost of producing that good” (2014, p. 58). The downfall is that some individuals may be worse off from international trade, while the country’s overall well-being is better off. Absolute and Comparative Advantage are a large part of international trade, which can be beneficial to the economy as a whole.

International trade is very important in this era for every international company, trade (export/import) in capital, goods and services between countries.