How does the theory of comparative advantage relate to the need for international business?
IntroductionIf you do everything better than anyone else, should you be self-sufficient and do everything yourself? Self-sufficiency is one possibility, but it turns out you can do better and make others better off in the process. By instead concentrating on the things you do the “most best” and exchanging or trading any excess of those things with someone else for the things that person does the “most best,” you can both be better off. Comparative advantage fleshes out what is meant by “most best.” It is one of the key principles of economics. Show Comparative advantage is a powerful tool for understanding how we choose jobs in which to specialize, as well as which goods a whole country produces for export. Can one country produce everything so cheaply that other countries have no production options and no work opportunities for their citizens? Do large countries—which can produce more of everything—take unfair advantage of small countries when they trade? Before reading about comparative advantage, you should review Exchange and Trade. After reading about comparative advantage, you may want to read about the Division of Labor and Specialization, about Globalization, Interdependence, and Local Trade, about Economic Growth, and about Barriers to Trade. Definitions and BasicsComparative Advantage. On Econlib:
Comparative Advantage, by Donald J. Boudreaux. Concise Encyclopedia of Economics
Treasure Island: The Power of Trade. Part I. The Seemingly Simple Story of Comparative Advantage, by Russ Roberts on Econlib
Comparative Advantage, by Dwight Lee. At CommonSenseEconomics.com:
In the News and ExamplesDon Boudreaux on Globalization and Trade Deficits. Podcast on EconTalk.
Trading countries both achieve gains from trade: Foreign Trade, or The Wedding Gown, by Jane Haldimand Marcet in John Hopkins’s Notions on Political Economy. 1831.
The Worldwide Decline in Conscription: A Victory for Economics?, by Joshua C. Hall.
A Little History: Primary Sources and ReferencesDavid Ricardo’s famous paragraph on comparative advantage (before the term was coined): Chapter 7, by David Ricardo, in On the Principles of Political Economy and Taxation
A Brief History of Comparative Advantage, by Morgan Rose. Teacher’s Corner on Econlib
Part I, Chapter III, The Principle of Comparative Advantage, by Frank William Taussig, from Some Aspects of the Tariff Question
David Ricardo’s contribution: Chapter VIII. Gains From Trade: The Doctrine of Comparative Costs, by Jacob Viner, from Studies in the Theory of International Trade
Advanced ResourcesRoberts on Smith, Ricardo, and Trade. Podcast at EconTalk.
Critiques to Ricardo’s idea of comparative advantage: Ed Leamer on Outsourcing and Globalization. Podcast at EconTalk. Discussion of comparative advantage and critiques starts at time stamp 16:21.
Related TopicsExchange and Trade Why is comparative advantage important for business?The benefit of comparative advantage is the ability to produce a good or service for a lower opportunity cost. A comparative advantage gives companies the ability to sell goods and services at lower prices than their competitors, gaining stronger sales margins and greater profitability.
What is theory of competitive advantage in international business?Competitive Advantage theory suggests that everyone is better off if decisions are made based on the competitive advantage at all levels – national, corporate, local, and individual.
What is comparative advantage and why is it important in international trade quizlet?While a country has an absolute advantage in producing a good over another country only if it uses fewer resources to produce that good, a country can have a comparative advantage when a good can be produced at a lower cost in terms of other goods.
What does the theory of comparative advantage suggest that countries should do?Comparative advantage suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in. Absolute advantage refers to the uncontested superiority of a country to produce a particular good better.
|