According to Adam Smith (1776) Wealth of Nations, absolute advantage is the ability of a country to produce more than other countries but with less resources. However the theory of comparative advantage holds that a country with an absolute advantage can still gain from specialisation in their most efficient goods. Building on from Ricardo’s theory of comparative advantage, two men; Eli Heckscher, and Bertil Ohlin developed a mathematical model that used a country’s factor endowments as a basis for prediction of production and commerce patterns. This model presented the idea that a country a country abundant
According to Adam Smith 1776) in…... a country has an absolute advantage in producing the product when it is more efficient in making that product than any other country. If two countries specialise in producing different products and trade amongst themselves, both these countries will have more of both products available to them for consumption (in which each has an absolute advantage) 2.2. Neoclassical Trade theory This is also known as Comparative Advantage. (David Ricardo1817) stated that if one country has an absolute advantage in producing two products over another country, trading with that other country will still yield more output for both countries than if the more efficient producer did everything for themselves. The country with
This fact led to a faster increase of world trade compared to output growth. Since 1985 world trade has grown nearly twice as faster as aoutput. Moreover, the composition of international trade changes, since before the Second World War agricultural products and raw materials were prominent in international trade, but after the main component of international trade has been the international exchange of manufactured good, as it is observable from Chart 1.2. A characteristic element of the second globalisation is the rise of multinational corporations accompanied by the increasing of foreign direct investment (FDI). In fact, multinational corporations use FDI with the aim of own and manage assets in more than one country with the purpose of production of good or services.
The Heckscher-Ohlin model of international trade argues that comparative advantage arises from differences in factor endowments (Rogowski, p. 3). Factors, in this case, being basic tools of production. It states that a country’s abundant factors will cheaper to export its scarce factors easy to import, or in other words, goods will be produced where it is cheapest to produce them (Oatley, 2014, p. 52). Countries like the U.S., for example, have lots of capital with little labor, while China is the opposite. These different factors shape the cost of production, as these countries abundant factors will be cheaper to employ than its scarce factors.
In other words, trade will be beneficial even if one country is less efficient in the production of two goods, so long as it is less inefficient in the production of one of goods. Due to the increasing development of production forces and the larger extent of specialization, the number of goods and services to meet human needs and wants has been more and more diversified, leading to interdependence among nations. In other words, specialization promotes trade demand and vice versa. A country cannot specialize its production without trading with others. It is international specialization that gives a manifestation of comparative advantage rule.
Absolute advantage results in increased productivity using fewer resources regarding labor as compared to other countries that also produce similar products or services. On the other hand, a country gains the comparative advantage over another through producing services or goods that have a lower opportunity cost as compared to anything else that the country could have done with its resources (Schumacher, 2012). Therefore, the cost factor is affiliated to absolute advantage whereas the opportunity cost factor is associated with comparative
(2007), which covers the whole of the UK manufacturing sector from 1973-1992, finds that there is a positive relationship between the presence of FDI and total factor production, where an increase of 10 points in FDI's presence leads to a 5% increase in total production factors, which proves the existence of the indirect effects of FDI on local production. Zhang (2001) also concludes that FDI had positive effects on the Chinese economy in terms of technology diffusion during the period 1984-1998. However, within the same context, there is some research that calls into question the ability of FDI to achieve the transfer of technology to the host economy, based on the claim that Multinational Corporations do not transfer highly advanced technology to their affiliates in host countries in order to maintain the superiority of domestic firms, and to protect themselves from potential competition (Glass and Saggi, 1998). In addition, Multinational Corporations may not spend as much on R&D in the host economy as they do in the country of origin, for the purpose of maintaining their technological advantage, and so their superiority, over local firms (Forte and Moura,
Based on their definitions Absolute advantage which compares the productivity of different producers or economies, in this case the correct definition given to Absolute advantage is that a producer needs smaller amount of inputs in order to produce the good as needed. Comparative advantage is defined as a party which produces a certain good or services at a lower cost comparing to another. Even if
Trade including export and import is very important for a country’s economy. There have been many famous scholars defending their theories about the importance of trade for a country. David Ricardo, a British political economist as well as one of the influential classical economists, introduced the concept of comparative advantage. He suggested that a country shall concentrate or allocate its resource in industries where it is most internationally competitive and trade with other countries to get the goods which are not locally produced. He also claimed that if one country is more competitive in every area than its trading partner, there is mutual national benefit.