International Trade Concepts Absolute and Comparative Advantage

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 or regions an advantage in growing certain plants.

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 countries that are exporting essential goods or increasing their comparative advantage for necessary items. A corporation's focus on only producing items with comparative advantage is called specialization (National American University, 2009).

Influences Affecting Foreign Exchange Rates A nation's exchange rate is the rate at which its currency can be exchanged for the currencies of other nations. Foreign exchange rates are influenced by a number of factors, including domestic economic and political conditions, central bank intervention, balance of payment position, and speculation over future currency values. Currency values fluctuate depending on the supply and demand for each currency on the international market.

In this system of floating exchange rates currency traders create a market for the world's currencies based on each countries relative trade and investment prospects. In theory, this market permits exchange rates to vary freely according to supply and demand. In practice, exchange rates do not float in total freedom as National governments often intervene in currency markets to adjust their.