Enormous growth of cross-border trade and investment. . Many firms have successfully lowered trade and investment barriers by NAS. Petitioning the World Trade Organization. 6. Which of the following most supports Country A and Country B becoming an economic bloc? NAS. Geographic proximity to each other. 7. All of the following are typical characteristics of emerging markets except NAS. Low Inward foreign direct Investment. 8. If last year one dollar equaled one Euro, and then the exchange rate shifted so that today one dollar equals two euros, which of the following would most likely not occur?
NAS. European firms lower their prices on goods made with U. S. Parts. 9. When firm managers research the external business environment of a potential market they most likely examine all of the following except NAS. Human resources. 10. All of the following are advantages that firms often experience through exporting except. NAS. Amplified country and corporate risk. Part B: In what way was Orchard’s Law of Comparative Advantage superior to Smith’s theory How can a nation that is less efficient than another nation in the production of all commodities export anything to second nation?
Trade between two countries has been going on since early days and economists eave given logical explanation for international trade and investment. They have written theories why nations promote trade and investment with other nations. One of the theories was proposed by David Richard The Comparative Advantage Principle which states the law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product most efficiently given all the other products that could be produced.
Comparative advantage theory is an international trade theory. It asserts that individuals or nations trade because they have superior productivity in particular industries, and that they should produce and export goods for which they possess a comparative advantage and import others in which other nations possess a comparative advantage. Two men dwell alone in an isolated island. To survive they must take on a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated and is faster, better, more productive at everything.
He has an absolute advantage in all activities. The second man is old, weak, and uneducated. He has an absolute disadvantage in all economic activities. In some activities the difference between the two is great; in others it is small. To work in isolation they both have to take interest so that an exchange or trade can benefit both of them. They should divide their work according to comparative, not absolute advantage: the young man must spend more time on the tasks in which he is much better and the old man must concentrate on the tasks in which he is only a little worse.
Such an arrangement will increase total production and/or reduce total labor. It will make both of them richer. Smith’s Absolute Advantage Theory states that a country benefits by producing only those products in which it has absolute advantage, or can produce using fewer resources than another country. For example consider Japan which doesn’t produce oil but it manufactures some of the best automobiles in the world. Saudi Arabia produces oil and it is the leader in producing, but lacks a substantial car industry.
If both of these countries were given resources to produce both oil and cars it would be a waste for both the countries therefore by trading with each other, Japan and Saudi Arabia employ their respective resources efficiently by mutually benefiting from each other’s relationship. Japan gets oil that it needs to power its cars, and Saudi Arabia gets the cars that its citizen needs. Thus products that countries produce and with which they can trade freely with others countries and can achieve substantial gains from trade and can result in improving national living standards.
With the Absolute Advantage Principle we can only gain in which one country is better off in producing its products or services in which it is advantaged to that country but in Comparative Advantage even if the country is not able to produce those products it can still trade and be advantageous to both the countries. Comparative Advantage and Trade: Trade allows countries to use their resources more cost-effectively through gaining expertise. It allows countries to become more productive and able to gain high a standard of living and will keeping the cost of everyday products minimal.
Without International Trade, most nations would be unable to feed, clothe, etc. Even countries which are rich in resources would also suffer immensely without trade. Some types of reduces would become unavailable, or obtainable only at higher prices. For example tea and sugar would become luxury items. Petroleum-based energy resources would decline. Vehicles would stop running etc. Not only nations get benefit from trade but companies as well as citizens get benefit from international trade, in truth modern life is impossible without it.
The concept of Comparative Advantage says that trade depends on differences in comparative cost; any nation can trade profitably with one another even if its real costs are higher in every product it produces. A nation might eave conceivably sufficient variety of production factors to provide every single product or services, but it cannot produce all products and service with equal facility. How can a Nation that is less efficient still export? Discussion: The gains from gaining expertise and trade are not based on Absolute Advantage but are based on Comparative Advantage.
Where each nation is specializing in producing the good in which it has comparative advantage, the total production in economy will also rise. Consider for example a farmer spends time in producing onions while a rancher on the other hand spends time in producing more meat. The total production of onions rises from 40 ounces to 44 ounces while that of meat production rises from 16 to 18 ounces. Both the farmer and rancher share the benefit of this increased production. We can see how the trade from gains arises in terms of price where both the parties pay to each other. Both of them have different opportunity costs and both can get a bargain.
That means each of them benefits from trade by obtaining a good at a lower price that is lower than the opportunity cost of that good. From the viewpoint of the farmer he gets 5 ounces of meat in exchange for 15 ounces of onions. In simple words he buys the 1 ounce of meat at the price of 3 ounces of onions and its price is lower than the opportunity cost which is 4 ounces of onions. Thus the farmers benefits from the deal because he is able to get meat at a good price and similarly the rancher also gets benefits from 15 ounces of onions for the price of 5 ounces of meat; I. . The price of onions is h ounce of meat its opportunity cost is lower and therefore the rancher benefits in buying onions from farmers. In this way the trade can benefit everyone because it allows specialization in products they have comparative advantage. The concept of Comparative Advantage challenges that trade depends on differences in comparative costs and any nation can gain profits with another nation even if its real costs are higher in whatever products it produces.
To illustrate how a nation less efficient to another nation can still trade from comparative advantage principle, consider the trade relationship between the United States and China. Suppose the United States produces coat hangers that its citizens need, but only at a high cost, because production of coat hangers requires labor, and wages in the United States are very high as compared o other countries like China, where wages are low as compared to the United States. Vocalizes such as pharmaceutical, the production in which it has abundant supply of knowledge workers and technology. In this way it is beneficial for United States in exporting pharmaceuticals and importing coat hangers from China. According to Comparative Advantage it is indeed advantageous for all countries to take part in international trade. The Comparative theory has advantage because it explains why it can be beneficial for two parties (regions, countries, etc. ) if one has the lower cost of producing some good.
The important is the opportunity cost of production not the absolute cost of production because the opportunity cost measures how much production of one good is reduced to produce one more unit of the other good. Whereas under Absolute Advantage one country can produce more output per unit of productive input than another. With Comparative Advantage, if one country has an absolute (disc)advantage in every type of output, the other might benefit from specializing in and exporting those products, if any exist. It explains how trade can be done even if the nation is less efficient than the other in terms of producing all modesties.
