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International Trade Concepts
Absolute and Comparative Advantage
Absolute Advantage
An absolute advantage is achieved when one country can produce a product at a lower cost than any other country, potentially gaining absolute control of the market for that good or service. Absolute advantage provides a country with leverage in international trade as it builds assets or wealth. Absolute advantage's can have a finite life as circumstances change. In the past French wine held absolute advantage, but recently, U.S., Australian, and New Zealand wines have started to become very competitive relative to French wines. In the United States, Ford Motor Company held absolute advantage, then General Motors, and finally other U.S. companies and foreign imports moved into the market. Absolute advantages are rare today, however some countries manage to approximate absolute advantages in some products. Climate differences can give some nations...
Saffron is perhaps the world's most expensive spice at around $40 dollars an ounce. It is native to the Mediterranean, Asia Minor, and India. Today saffron is cultivated primarily in Spain, where the plant thrives in its soil and climate. Attempts to grow Saffron in other parts of the world have generally been unsuccessful (National American University, 2009).
Comparative Advantage
A comparative advantage is achieved when one country or business can produce a specific product at lower cost than another country. Countries tend to export goods with comparative advantage to gain market share for that good or service. Producing or exporting goods in which a country has comparative or absolute advantage efficiently facilitates trade as it increases interdependence. Producing only those goods that can gain comparative advantage leaves a country vulnerable to restrictions imposed by…
References
Kurtz, D.L. (2010). Contemporary Business. 13th ed. Hoboken, NJ: John Wiley & Sons Inc.
National American University (2009, November 11). International business instructional materials. Version 3. Rapid City, SD: National American University.
Brock and Dobbelaere (2003) demonstrate that wage price competition from overseas reduces wages in the developed world, even when jobs are maintained. However, international trade based on comparative advantage should also create opportunities and indeed it does. The reallocation of resources to improve efficiency means that less manual labor is conducted in the West because on a comparative basis Western nations perform better at innovation, and at knowledge-intensive businesses in
Mercantilism as a philosophy may be dead, but special interests that lead to trade controls are alive and well (Mercantilism today: how a dead philosophy comes back to life, 2003). Trade controls that affect price and indirectly quantity include tariffs, subsidies, arbitrary customs-valuation and special fees (Daniels, Radebaugh, and Sullivan, 2007). Trade controls that directly affect quantity and indirectly affect price include quotas, voluntary export restrictions, "buy local" legislation,
Trade: Gains From Trade Ricardo vs. Smith Heckscher-Ohlin and the Linder Hypothesis Problems with Specialization Benefits of Trade to the United States Developing World, Trade, and Globalization Trade: Gains from Trade The concept of comparative advantage in trade is an old and longstanding one. Simply put, the idea of comparative advantage is that a nation, by playing to its strengths, can experience greater gains from trade than from self-sufficiency. "By instead concentrating on the things you do
international trade the theories of absolute and comparative advantage are important. The concept of absolute advantage is seen in the trade theories of Adam Smith, originally published in 1776, where it was argued that countries should produce the goods that they can create with the lowest total costs (Smith, 1994). A country has an absolute advantage if they are able to produce a good at the lowest overall cost
International Trade Free trade, based on the theory of comparative advantage, is a textbook ideal that does not exist in the real world. Free trade would be entirely uninhibited. When Ricardo imagined the idea, just to make the concept work he had to ignore things like transaction costs, transportation costs and other real life variables. Thus, today, where such variables exist in near-infinite complexity, free trade would be impossible, and the
International Trade Theories International trade may be classified as the trade of capital, goods, and services across international boundaries or areas. In many nations, such trade signifies a substantial share of the country's gross domestic product (GDP). While international trade continues to be present throughout a lot of significant research for trade history (see Silk Road, Amber Road), the fact remains that the over societal, economic and political importance for international