Individual Assignment Major Trade Theories
Absolute advantage theory addresses when a country has multiple products. “According to theory of absolute advantage, a country has an absolute advantage over the others if it is able to produce more of a product or service with the same number of resources or the same number of a good or service with fewer resources” (Salvatore, 2005, p. 0). This occurs because of the existence of better resources for producing a particular product or service.
The concept of absolute advantage can also be applied to other economic entities, such as regions, cities, or firms, but we will focus attention on countries, specifically in relation to their production decisions and international trade flows. ComparativeAdvantage: GeneralTheory: Comparative advantage theory addresses when a country has abundance in trade.
According to theory of comparative advantage, a country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than the others” (Salvatore, 2005, p. 33). In other words, the benefits of a country that is low-producing a good or service would benefit as a country to specialize in producing that good or service and compare with the production of other goods or services. Hechscher-Ohlin Factor Endowment
General Theory: The Hechscher-Ohlin factor endowment theory explains the composition of international trade in terms of the relative factor endowments of different countries. “The Heckscher–Ohlin (H–O) theory can be expressed in the form of two theorems: first theory, H–O theorem deals with and predicts the pattern of trade and the second part is the factor–price equalization theorem deals with the effect of international trade on factor prices” (Salvatore, 2005, p. 82).
For example, countries with a relative abundance of labor should specialize in the production and export of labor-intensive goods and given their relative scarcity of capital should import capital-intensive goods. Similarities and Differences International trade is the exchange of goods and services between countries through exports andf imports. The international trade theories support international trade for all countries.
Although trade between the industrially developed countries and the developing countries continues to be important based on an exchange of dissimilar goods, e. . manufacturers traded for basic foodstuffs and raw materials, this is dwarfed by trade between the industrialized countries themselves. Many similarities and differences between Absolute Advantage and Comparative Advantage are both theories that influence and provide good international trading among developed and underdeveloped countires. Comparative advantage focuses as the driving force of specialization. It is Comparative Advantage that determines whether trade is beneficial or not.
Comparative advantage arises because the marginal opportunity costs one good in terms of the other differ as between countries. And the relationship of similarity of the Hechscher-Ohlin Factor Endowment theory and Comparative Advantage is demonstrated with the marginal opportunity cost factor. There are many similarities and differences between Comparative Advantage and Absolute Advantage. Some simple differences between the two would be, comparative advantage uses the driving force of specialization in products and services in which they have a comparative advantage.
Another advantage of comparative advantage is if one -country has an absolute advantage or disadvantage in any kind of output, any of the other countries will maybe profit from m ajoring in and distributing those products. However, absolute advantage of a country economically has a benefit over another country, in a precise moral, when it produces that moral at a lower cost. Inaddition, a country using the same contribution of properties of a country with an absolute advantage will have superior productivity.
As for the Hechscher-Ohlin Factor Endowment theory and Comparative Advantage these theories are similar in point-of-view as in regards to the benefit of specialization. “That is, each nation specializes in the production of and exports the commodity intensive in its relatively abundant and cheap factor and imports the commodity intensive in its relatively scarce and expensive factor” (Salvatore, 2005, p. 83). Comparative Advantage Analysis What cultural, physical, economical, financial, and political impediments might prevent the successful application of your selected trade theory?
As for the Comparative Advantage trade theory, culturally impediments such as “humanity has the ability to make development sustainable – to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs”. Sustainability can be viewed as the balance between what inputs our business takes from its resources and the outputs which it returns to the environment from raw materials, work-life balance to bottom line profit” (Figge and Hahn, 2005).
The physical impediments of this trade theory will be easy to measure due to the economical, finanical and political impediments of the underdeveloped and developed country. Without these factors it is difficult to expand these underdevelop and develop countries globally and industrilization benefits will be at a slow rate. As for my opinion, for a country to reap the benefits of the Comparative Advantage trade theory, one’s infrastructure, financial system, economy and political factors must be up to stanndard.
Comparative advantage arises because the marginal opportunity costs one good in terms of the other differ as between countries. However, it is comparative advantage that determines whether trade is beneficial or not for these countries.