Objective 2.01: Understand the concept of Comparative Advantage and Global Factors of Production

Theory International marketers must become advocates of lowering trade barriers and using trade organizations for support. Economists propose theories to explain how economic systems operate. One theory includes the concepts of absolute advantage and comparative advantage.

Absolute Advantage Absolute advantage means that a country can produce more units of a product at a lower cost using fewer resources than other countries. Ex. The U.S. has an absolute advantage over Japan in rice and cotton production, meaning the U.S. can produce much more rice and cotton at a lower cost per unit than Japan.

Comparative Advantage The law of comparative advantage states that a country should specialize in the production of a product that it can produce relatively better, or more efficiently, than other countries. Ex. Rice production makes better use of Japan’s resources than cotton production. Cotton production makes better use of the U.S. resources than rice production. Thus, Japan is relatively more efficient than the U.S. is in producing rice, and the U.S. is relatively more efficient than Japan is in producing cotton.

Production Possibility Curve A production possibility curve shows the tradeoff in production between two products.

Opportunity Cost An opportunity cost is the value of what is given up in producing one product when another product is produced. Ex. Each country can produce both cotton and rice, but producing more of one product reduces production of the other. Each country’s production possibility curve has a different tradeoff slope which represents an opportunity cost. http://www.youtube.com/watch?v=uWwrb--yk- w&feature=related

Commodities A commodity is a raw material or agricultural product. Therefore, a commodity may be the same regardless of who produces it. Ex. Many consumers consider rice to be of the same quality no matter where it comes from. Thailand is the world’s leading exporter of rice. Countries attempt to maintain production in key areas to make their production process more efficient. By doing this, they increase their comparative advantage.

Global Factors of Production Factors of production are items that are used to produce products. Natural Resources such as land, forests, minerals, oil, and bodies of water. Human Resources (or labor) such as workers, management, and entrepreneurs. Capital Resources (or manmade items) such as buildings, machinery, and funds.

Global Factors of Production Developed countries such as the U.S. have a comparative advantage in a highly skilled workplace. Which allows them to create higher-value products. Less developed countries have maintained a lower-paid, unskilled workforce. They traditionally focus on more labor-intensive work.

Global Factors of Production Some countries, such as the U.S. have available resources in all factors of production. They have lots of land, skilled labor and capital. U.S. has large areas of farmland, fresh water, and minerals. The U.S. has the most educated workforce in the world. The U.S. also has a highly entrepreneurial culture and a good capital market.

Comparative Advantage of Nations How do countries gain competitive advantage? A country’s industries develop competitive advantages through strong internal competition. As domestic countries compete, only the strongest and the best producers survive. As a result, higher-quality products are produced and exported.

Examples: Companies in Japan have had a comparative advantage in producing small home electronic devices and exporting them around the world. Part of this comes from Japan’s factors of production such as a skilled manufacturing workforce and supplies of component products. It can also be attributed to internal competition heightened by a consumer market that demands quality. Japan’s highly competitive home electronics industry has forced Japanese producers to manufacture some of the world’s best electronic devices.