Comparative advantage is the theory that free trade between two or more countries will increase consumption and is of mutual benefit to both countries. Each country should export a good for which it has a comparative advantage over and export surplus production in exchange for goods produced in another country which has a comparative advantage for the good. This is under the assumption that there is differences in labour productivity in both countries. According to Comparative advantage even a country with a comparative disadvantage will gain from specialising in most efficient goods. 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.
Heckscher-Ohlin Theory Comparative advantage comes up from differences in national factor endowments, such as land, labour, or capital, as opposite to Neoclassical trade theory which stresses productivity of products being produced for consumption. This theory suggest that the country should focus on exporting products using its scarce resources and brings across a free trade principle where goods will be moving freely without any trade barriers implying that this would make flow of resources in and out more demand and more supply will increase the country’s economy(Eli Heckscher 1919 &Bertil Ohlin1933). 2.4. New Trade Theory Achievement of economies of in 1970’s scale, trade can increase the different sorts of goods available for consumption and those goods can be in a decreased affordable price. Further, the ability to capture economies of scale before anyone else is an important first-mover advantage.
Solow and T.W.Swan developed simpler growth model. Their model was actually an extension of the Harrod Domar’s model through addition of labor as a factor of production. Solow assumes that there is only capital and labor as a factor of production. The technology is represented by means of a neo-classical production function with constant returns to scale, decreasing productivity with respect to physical capital and possibly labor augmenting technical progress. He also assumes flexible prices to construct a model that conciliates full employment of resources with growth.
Food and other products have become cheaper and the choice of products available has expanded considerably. International agricultural trade in general has grown significantly and this growth has been marked by an increasing inter-dependence of national economies seeking greater efficiency in the production and marketing of agricultural
Availability of multiple choices - Foreign trade helps in providing a better choice to the consumers. It helps in making available new varieties to consumers all over the world. 4. Raises standard of living of the people- Imports can facilitate standard of living of the people. This is because people can have a choice of new and better varieties of goods and services.
This means that, at regional level, there is a wider application of the principle of comparative advantage. Market access; easier access to each others markets means that trade between members is likely to increase. Trade creation exists when free trade enables high cost domestic producers to be replaced by lower cost, and more efficient imports. Because low cost imports lead to lower priced imports, there is a consumption effect; which increased demand resulting from lower prices. Economies of scale; producers can benefit from the application of scale of economies which will lead to lower costs and lower prices for consumers.
This results in a more task-focused environment, which leads to a conclusion that VT tend to be more effective than face-to-face-teams (Nydegger, 2010). The broader geographic spread of team members is accountable for the speed and flexibility of responding to market demands, which leads be increased and a closer relationship with contractors and clients can be realised (Bergiel et al., 2008). Moreover, it is argued, that team member performances are easier to measure and compared (Gibson and Cohen,
Smith uses the idea of division of factor of production i.e. labour to elaborate about the theory of absolute advantage. The theory of absolute advantage states that if there are two countries and two commodities traded, and one country is more efficient in terms of using fewer factors in production of one commodity than the other country, and the other country is more efficient in production of the other commodity then there is a room for a profitable trade between the two countries (ibid: 97). For instance, in a hypothetical world of only two countries involved in trade i.e. A and B and only two goods traded eg.
In this type of economy, there is freedom of choice for the consumers to choose the goods and services that they wanted to buy. On the other hand, Workers are free to choose what jobs they wanted to apply and the producers are also free to choose what goods and services that they want to produce and sell to the society. Since the productions are undertaken for profit, companies will supply lower costs of production to their consumers if the companies are more efficient than the others. When there are changes in what consumers wanted to buy, the profit motive will makes the companies to change output very fast. Thus, companies which do this will earn higher profits faster than the ones which change their production slower.
Then are there still benefits to trade, and will trade event occur? In reality, exchanging goods just happens when both parties gains benefits. If a country gets profits and the other does not, they will refuse to take part in this transaction. However, the theory also partly explains what brings benefits among developed countries. Then the theory of comparative advantage – an extension of absolute advantage was invented by an English economist - David Ricardo (1817).