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Comparison of Absolute and Comparative Advantage

1860 words (7 pages) Essay in International Relations

08/02/20 International Relations Reference this

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International relations is concerned with the way in which nations interact in regards to culture, politics and economic growth. Countries have to support and interact with one another in order to grow and bring about financial stability among nations. The two most important concepts when handling international relations are an absolute and comparative advantage as they are primarily involved in how nations devote resources to the production of a particular good. Through these two concepts, free trade is well evaluated and understood hence countries can describe their essential economic benefits. The basis of the idea Absolute advantage is related to the capability to produce more of the product by employing less given resources without considering competing entity. For instance, if a country has an absolute advantage, it means that they sell their products at a lower cost than other countries. Comparative advantage, on the other hand, is all about opportunity cost and lower margin that is enjoyed by a party over the other when particular goods are produced. The essay shall discuss the theories of comparative and absolute benefit by providing a practical foundation for opinions in support of free trade.

The Two Concepts in Relation to Free Trade

It is clear that both comparative and absolute benefit determine whether a government is ready to lead in corporate or not. These concepts rule over trade and are the key to an economically stable country as well as encouraging free trade. For example, countries that exercise comparative advantage tend to enjoy more successful business ventures regarding selling their products. These kind of countries are at a competitive advantage because they have efficient technologies, capital, and structures that guarantee they produce at a lower opportunity rate (James, 2013). On the other hand, the ones with an absolute benefit have power in setting the market prices as a result of their production systems which are cheaper regarding resources, labor, materials and many more. Due to this kind of cheap resources any country experiencing an absolute advantage thrives in the marketplace as they can sell at a competitive price.

 However, going through the concepts of the two theories absolute benefit is more paying than comparative since the latter enjoys one hundred percent independence over the other countries whereas the former depends on effectiveness as the foundation of competition. For example, if both Japan and the United States can manufacture cars, but Japan produces vehicles of advanced value, and at a quicker level, then this is defined as an absolute advantage (Erikson, 2016).  When a country wants to win the competitive advantage, they have to be very keen on the type of product they choose to produce. In the example, US may be better served with resources and workforce rather than competing with Japan which is more efficient and produce faster hence this is considered as an absolute advantage in trade.

 Countries that enjoy comparative advantage can, therefore, produce and export rather than import as it is cheaper to import and the opportunity cost is lowered (Viner, 2016). For example, if both Japan and US can produce cars and televisions efficiently, U.S. opportunity cost of production is lesser than Japan hence it has a proportional advantage despite Japan being more effectual manufacturer.  Since both countries cannot produce both products efficiently, the most effective approach is for each nation to deliver what it can best and enjoy results at rational amounts since each is concerned with the efficient invention of one item.

 According to theorist and economist, Adam Smith republics should concentrate with the goods they can efficiently produce and trade for the goods that they can’t produce (Joseph, S., & DOAB, 2013). Smith, however, described the international business as it related to absolute advantage until the 19th century where David Ricardo reached at the perception of comparative gain as the real benefit of international trade. He continued and described how nations gain from transacting even when one suffered an absolute benefit in manufacturing everything. He later continued and refuted Smith’s argument that a country should only focus in products that they can manufucture best but he suggested that it should be goods that can be made with a lower opportunity price.

Comparative Advantage in Relation to Free Trade

It is very healthy for countries to trade actively and improve the economy hence business is about reasonable benefit, not absolute gain. Under free trade, states manufacture products in which have a reasonable benefit. Free trade generally means that states can import and export goods without any tariff barriers hence comparative advantage increases economic welfare for all countries (Trebilcock, 2015). The countries are benefited through getting products for less than it would cost them to make hence foreign nations get a market for its goods. The world also benefited through economic stability because comparative advantage causes manufacture to come from the most resourceful manufacturer, maximizing world productivity. Comparative advantage is a good and powerful tool of observing how we are keen to choose jobs in which to specialize as well as the goods that a whole country should export.

Countries with moderately plentiful human abilities do have a relative gain in all the product that use human services more intensively. There are certain materials such as electricity that entail a high capability of workforce to manage the labor for example engineers, programmers, and the likes. Such kind of products gains a comparative advantage in countries like Hong Kong that are relatively low on a skilled workforce. By lowering the cost of production, economies of scale provide a comparative advantage (Ackah & Aryeetey, 2012). This is where economies of scale are attained over the existence of a huge home market and policies made to large markets outside the country so as to imply on the production costs. Countries that do not possess superior technologies have availability of resources which provides the country with a comparative advantage. Free trade has brought about interactions, and fewer restrictions are used as it promotes growth and prosperity. Citizens can freely purchase goods in other EU countries without limitation hence leading to the development and reduction of trade barriers.

The theory of comparative advantage remains the heart of economist and international trade. This is because it provides the underlying economic ethic continually. Trade is very advantageous as it occurs among countries that vary in their technological capacities to produce goods and services.  If countries differ in the endowment of resources which also encourage trade because of the different skills and abilities of a countries workforce hence there is pure exchange model (Stern & World Scientific, 2011). If the demand for preference differs between countries thus becomes a breeding ground for the trade as different individuals in different countries may have different needs for various products. For example, the Chinese are likely to demand more rice than Americans, even if consumers face the same price. When the government decides to tax and subsidy, it alters the price charges for goods and services and is one way or another very advantageous in the production of certain goods.

Ricardian model of trade predicts the direction each country exports its comparative advantage good. He continues and states that a country gains from trade when it entirely specializes in its comparative advantage good. Free trade occurs when relative price differs from autarkic comparable cost hence a country earns from trade. For instance, when a state can produce more than two goods its comparison of bilateral labor and coefficient ratio is not enough to determine its comparative advantage (Schumacher, 2012). This is because many problems arise as one is not able to predict trade patterns due to the potential in production. It is imperative for countries to realize their potential to gain from trade. They must be ready to trade buy goods that are produced at a lower cost elsewhere. A country or person can have an absolute advantage in both goods or activities and yet gain trade by specializing in the products or activities in which it has a comparative advantage.

Reading through various research and statics trade can only be accomplished and realized through selling goods at the marketplace. When countries are willing to benefit from the trade they significantly increase production in their comparative advantage and trade with each other. For the exchange to be mutually beneficial, it must be determined by opportunity cost and comparative advantage (In Jones & In Weder, 2018). The theory of comparative advantage hence explains why countries trade as well as showing the gains from international trade results and producing at a lower opportunity cost.

In conclusion, the study affirmed that Countries have to support and interact with one another to grow and bring about financial stability among nations. The two most important concepts when handling international relations are an absolute and comparative advantage as they are involved mainly in how nations devote resources to the production of a particular good. This concepts rule over trade and are the key to an economically stable country as well as encouraging free trade. It is very healthy for countries to trade actively and improve the economy hence trade is about comparative advantage, not absolute advantage. Under free trade, countries produce goods in which they have a comparative advantage. It is crucial for countries to realize their potential in order to gain from trade. They must be ready to trade and buy goods that are produced at a lower cost elsewhere.

References

  • Ackah, C., & Aryeetey, E. (2012). Globalization, trade, and poverty in Ghana. Ottawa: International Development Research Centre.
  • Erikson, E. (2016). Between monopoly and free trade – the English east India company,
    Princeton University Press 1600-1757.
  • In Jones, R. W., & In Weder, R. (2018). 200 years of Ricardian trade theory: Challenges of globalization. Cham: Springer.
  • James, A. (2013). Fairness in practice: A social contract for a global economy. Oxford [etc.: Oxford University Press.
  • Joseph, S., & DOAB: Directory of Open Access Books. (2013). Blame It on the WTO?: A Human Rights Critique. New York: Oxford University Press.
  • Publishing, O. E. C. D., & Organisation for Economic Co-operation and Development Secretary-General, (2011). Globalisation, Comparative Advantage and the Changing Dynamics of Trade. Paris: OECD Publishing.
  • Schumacher, R. (2012). Free trade and absolute and comparative advantage: A critical comparison of two major theories of international trade. Potsdam: Universitätsverl.
  • Stern, R. M., & World Scientific (Firm). (2011). Comparative advantage, growth, and the gains from trade and globalization: A festschrift in honor of Alan V. Deardorff. Singapore: World Scientific Pub. Co.
  • Trebilcock, M. J. (2015). Advanced introduction to international trade law. Cheltenham, UK: Edward Elgar.
  • Viner, J. (2016). Studies in the Theory of International Trade. London Taylor and Francis.
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