CLASSICAL SOURCES OF COMPARATIVE ADVANTAGE 3.1 Comparative advantage in Ricardo’s theory. In the first paragraph we explained the differences between comparative advantage and absolute advantage according to Ricardo’s two nations-two goods-one factor of production model. Ricardo bases comparative advantage on technology. In an economy in which there is only one factor of production it is important for a country to maximize the technology it has available in order to create and exploit a latent comparative advantage. Technology in this model is correlated to unit-labour costs and productivity.
efficient market. In a perfectly efficient market, prices always reflect all known information and they adjust instantaneously to new information. In an economically efficient market, prices might not adjust to new information right away, but over the long run, speculative profits cannot be earned after factoring in transaction costs. Economic efficiency is the more commonly used in finance research. Jones (1998) argues that the capital market is not perfectively efficient, and it is not certain perfectly inefficient.
Eveline Adomait and Richard Maranta, in their book titled “Cocktail Party Economics” (CPE), discuss certain conditions or characteristics which contribute towards the efficiency of competitive markets. For instance, a well-functioning free market which allows individuals to buy or sell what they want with the available methods that work best for them typifies the concept of freedom. This freedom to buy and sell leads to economic efficiency/surplus (Adomait & Maranta, 2012, p. 111 & 130). Such free markets force supply (marginal cost) to equal demand (marginal benefits) at the market price (Adomait & Maranta, 2012, p. 107), and the price must match the personal benefit of consuming the product (Adomait & Maranta, 2012, p. 108). These conditions
These different factors shape the cost of production, as these countries abundant factors will be cheaper to employ than its scarce factors. For example, the U.S. has a comparative advantage in computers and not shirts because the U.S. is abundantly endowed with physical and human capital and poorly endowed with low skill labour (Oatley, p. 53). The principle of comparative advantage says welfare gains do not require a country to have an absolute advantage in anything. As long as it is better at doing some things than others, it gains (Oatley, p.
Customers pay for value, and offering prices, lower than competitors, for the same benefits or creating unique benefits for higher price, creates superior value. A company implementing a strategy for creating value, different from competitor’s strategies, has a competitive advantage. (Barney,1991), thus, giving Amazon, a strong chance against its competitors. Petaraf and Barney (2003), stated that when a company creates greater economic value, it has an advantage over its competitors. Economic value is the difference of the perceived benefits received by the customers from the company’s economic cost.
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
By using statistics, correlation and regression analysis investigator determine that net interest margin, bank size, and industry production growth rate has positive impact on the asset and equity. Non-performing loans and inflation have adverse impact on Return on assets while real gross domestic product has significant impact on ROA. Therefore, Capital ratio has a significant impact to ROE. On the other hand, Gul, Irshad & Zaman (2011) studies the impact of bank-specific features and macroeconomic indicators on bank’s profitability in the Pakistan’s banks from 2005 to 2009. They find that external factors of the banks have significant impact on the profitability.
From his perspective, a practical generalized model of optimal capital structure may not be feasible; however, existence of more equity may indicate more power to the managers as they tend to use debts more for contingencies during crisis situation to mitigate solvency risks. In a recent theory Brav (2009) added a new dimension to debt-equity optimization proving that the sensitivity of the controllers of the firm defines how much they allow equity finance compared to debt finance. Traditionally, debt financing has been considered to be safe but curtailing the growth of the firm. Brav (2009) argued that private companies tend to stay away from equity markets and prefer to be more debt financed than equity financed due to high sensitivity to fluctuations in performance. They also argued that the structure of management plays a major role in choosing debt versus
Banks play very important roles in the economic development of nations as they will over supply of money in circulation and are the main stimuli of economic progress. Therefore, a strong banking sector is vital for growth, generating wealth and increasing Gross Domestic Product (GDP) growth. Dr. Dhanuskodi, 2012, said that bank performance is the reflection of the way in which the resources of a bank are used in a form which enables it to achieve its objectives. As a result, not all factors are related in contributing the bank profitability. Research is revealing that the performance of a bank was depended on certain factors and not same for all banks.
Literature Review The Efficient Market Hypothesis The efficient market hypothesis or EMH is one of the fundamental theories of traditional finance. Two economists, Paul A. Samuelson and Eugene F. Fama, independently developed the efficient market hypothesis in modern financial times, but the phenomenon behind the efficient market hypothesis goes as far back as 1565, with evidence of random walks in the market. The efficient market hypothesis simply states that markets are rational in nature, so all available information is fully reflected on the prices of market securities as it follows the random walk model, which implies that the distribution of portfolio returns are time-invariant (Keim, 1983). Eugene