Economic Concepts Affect Strategic Planning

Economic Concepts That Affect Strategic Planning: Comparative Advantage and the Importance of International Trade

The concept of free trade vs. protectionism is based upon the concept of securing comparative advantages. A "comparative advantage exists when a country has a margin of superiority in the production of a good or service i.e. where the opportunity cost of production is lower" (Comparative advantage, 2014, Tutor2U). For example, it makes little sense for the United States to try to grow bananas, given the excessive cost this would entail, versus importing them from the Southern hemisphere. In their strategic planning, companies choose to produce goods and services which they can do at a relatively lower cost than their rivals abroad. This enables them to price their goods and services lower, benefiting the consumer at home and abroad as well as the corporation.

However, not all aspects of comparative advantage are so salutary. One source of comparative advantage is the "the quantity and quality of factors of production available" including labor (Comparative advantage, 2014, Tutor2U). An advantage can be secured due to a more educated workforce but can also be rooted in the presence of a less expensive workforce and a lower minimum wage and standard of living for ordinary employees (Comparative advantage, 2014, Tutor2U). While the country can reap the positive aspects of comparative advantage such as the government and private industry's investment in valuable research and development, other factors such as a 'cheap' currency can also make goods and services from one nation more popular abroad but more difficult for native workers to afford those items. Finally, even in the ostensibly global marketplace of the 21st century, countries still protect certain domestic industries by leveraging high tariffs and creating trade barriers (like quotas or subsidizing producers) which can minimize the impact of comparative advantages. This limits the degree to which comparative advantage can be used globally to secure an advantage for either a specific business or an entire nation