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International Trade Ideas Total Comparative and Competitive Advantage

Absolute gain theory was first offered by Adam Smith in his book "The Riches of Nations" in 1776. Smith provided the first concept of a nation's riches. Adam Smith is a grandfather of economics because he presented two important principles that lots of of the new trade ideas derive from both of these main concepts, that happen to be expertise and free exchange (Cho et al. , 2000). However, many arguments were made and many economists thought there was a problem with the idea of absolute advantage after David Ricardo shared the idea of "comparative cost" (aka "comparative advantage") in the early 19th hundred years (Curry, 2000). Despite the fact that Smith and his supporters presented many important details for the thoughts of economical, it is too complicated with this simple version of trade theory in the current global economy. In 1990, Michael Porter presented the diamond style of new competitiveness theory (Cho et al. , 2000). These three trade theories are important in order to make a country or business efficiently. Therefore, the importance of absolute benefit, comparative advantage, and competitive advantage will be discussed thoroughly.

Absolute gain is the ability to produce a good with fewer resources than other companies (Ayers et al. , 2005). According to Joseph A. Schumpeter (1954, 374), "seems to have believed that under free trade all goods would be produced where their utter costs in conditions of labor are most affordable (Van Marrewijk, 2009). " Smith shows that a country should export those goods and services for which it is more effective than other countries are, and import those goods and services that other countries have significantly more effective than it is. For instance, assume there are just two countries in the world- France and Japan; there are just two goods - Wine beverage and Clock radios; and there is merely one factor of development- Labor. In France, 1 hour of labor can produce either two bottles of wine or three clock radios. In Japan, 1 hour of labor can produce either one wine or five clock radios. Therefore, the absolute advantage to create wine beverage is France because 1 hour of labor produces two containers in France, but Japan only produces one. The absolute advantage to create clock radios is Japan because 1 hour of labor produces five clock radios in Japan while France only produces three. France is more efficient in the creation of wine beverages and Japan is more efficient in the development of clock radios. If these two countries have the ability to trade with each other, they both will be better off (Griffin et al. , 2010).

Comparative Advantage

The theory of absolute advantage is practical intuitively. Unfortunately, the idea got a problem. Imagine if one country had an absolute benefits in both products? David Ricardo resolved this problem by introducing the theory of comparative gain, which states a country should specialize and export those goods and services for which it is relatively more productive than other countries are and import those goods and services for which other countries are relatively more successful than it is (Griffin et al. , 2010). Therefore, matching to this theory, a country must specialize in order to gain from trade. A country has a comparative edge if it can produce a good at less opportunity cost than could other countries. For instance, Michael Jordan picked baseball as his job and economics as his major. He had to produce a choice to be able to master other majors or jobs. He chose baseball where he could shine in along with his area of relative strength. Alternatively, Doug might take longer to mow back yards than other folks would take. Regardless of whether he cannot do anything well, they can still do some things relatively better than other things. People would still retain him because he would charge them significantly less than the ability cost of their own time. In this case, JORDAN might hire him because the opportunity cost of his time would be too much. It might be unrelated that whether Michael could do his own yard faster (Ayers et al. , 2005). Despite the fact that the comparative advantage is very useful for explaining the reason why of trade and the raises welfare of the trading lovers by trade, this theory continues to be incomplete. A couple of two problems in this theory. First, the extreme amount of expertise can be forecasted by this theory, but in some countries, they not only produce one good but many import-competing products. Second, the trade predicated on distinctions in country efficiency levels between countries, but it did not explain the living of these variations (Cho et al. , 2000).

Competitive Advantage

The leading theorist of competitive gain theory is Michael E. Porter. Matching to Porter, "National prosperity is established, not inherited". It grows with natural endowments in a country, as well as its labor pool, its interest rates, or its currency's value. The competitive advantage of nations is the capacity of its industry to innovate and upgrade to form a nation's competitiveness. Companies benefit from having home based suppliers aggressively, local rivals firmly, and requiring local customers. Geographic cluster or companies concentrations founded competitive advantage in various parts of the same industry. Regarding to Porter, nations are most likely to succeed in industries where in fact the national 'diamond' is the most favorable. He believes that success in international trade comes from the four interrelated components, that happen to be factor conditions, demand conditions, related and promoting industries, and strong strategy structure, and rivalry. Porter also figured their house environment is the most forward-looking, challenging, and strong so that countries flourish in particular sectors (Cho et al. , 2000).

Companies achieve competitive advantages from serves of invention. They approach technology in both new technologies and new means of doing things. Creativity can be represented in a new product design, new production process, or a fresh online marketing strategy. Perceiving an completely new market opportunity can contribute to create competitive advantage from some enhancements. Innovation produces competitive benefit when rivals are slow-moving to respond. For instance, in autos and home consumer electronics companies, Japanese companies focused on smaller and lower capacity models that overseas competitors despised as low earnings, low importance, and low attraction (Cho et al. , 2000).


The three traditional trade ideas were discussed. They are all useful ideas that remain in understanding a lot of professional and trade plans nowadays. For example, when a country considers industrial and trade regulations, the comparative advantages theory can be considered a basic guideline. Because today's world is much more complicated than before, those theories are not acceptable in explaining the international trade in nowadays situation. The main goal of model building is understand the world easily by realize the main variable or parameters (Cho et al. , 2000).

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