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Primary Task Response: Within the Discussion Board area, write 400â€“600 words that respond to the following questions with your thoughts, ideas, and comments. This will be the foundation for future discussions by your classmates. Be substantive and clear, and use examples to reinforce your ideas.
In the Mercantile period, from the 16th through the end of the 18th centuries, trade was driven by a need to accumulate gold and silver. Nations worked to restrict imports and drive exports. With the advent of the Industrial Age, classical economists began to look at trade and international commerce in a different light. In his seminal work The Wealth of Nations, Adam Smith discussed the idea that the basis of trade could be seen in light of what he called absolute advantage. His contemporary, David Ricardo, took a different and modified approach and laid out a framework called comparative advantage. This latter theory is the basis for all modern views of international trade. For this Discussion Board, complete the following:
- Define absolute and comparative advantage.
- Compare the two views on trade.
- How does the concept of opportunity cost factor into comparative advantage?
- Discuss why you think comparative advantage has become the fundamental and accepted theory of trade. Provide concrete examples.
Responses to Other Students: Respond to at least 2 of your fellow classmates(post are below) with at least a 100-word reply about their Primary Task Response regarding items you found to be compelling and enlightening. To help you with your discussion, please consider the following questions:
- What did you learn from your classmate’s posting?
- What additional questions do you have after reading the posting?
- What clarification do you need regarding the posting?
- What differences or similarities do you see between your posting and other classmates’ postings?
below are the 2 post needed to be responded too:
Absolute advantage refers to the ability to produce more or better goods and services than somebody else. This view tends to be beneficial to one party. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume. This view tends to benefit both parties involved in the trade agreement. (Investopedia)
Comparative advantage is the idea that countries can have an advantage over others with respect to the production of a specific good in relation to their production of other goods, although it may be more expensive for them to produce all goods in an absolute sense. If each country specializes in the production of goods for which they have a comparative advantage, the countries can trade with one another to achieve greater results than any could on their own. (Quora 2018)
If I buy goods from you where you have comparative advantage over me and you buy goods from me where I have comparative advantage over you in that good, then effective trade will balance the economies in terms of exchange rates and values of products. Both doesn’t have to allocate resources where they have no advantage in producing. (Quora 2015)
In theory the views on trade referring to absolute advantage is one where trade is not mutually beneficial to both parties involved. When dealing with trade where comparative advantage is being used, both parties will produce more and consume less of different goods. This will in turn benefit both parties involved in the agreement.
The reason I feel that comparative advantage has become the fundamental and accepted theory is because this theory lends itself to all parties involved to prosper while benefiting from goods that are produce or consumed by all parties. For an example, one could look to the United States and China. The United States produces high quality goods with a high cost of labor and sells theses goods to various countries. This has made the United States very powerful and successful. China on the other hand produces a higher volume of goods with a lower cost of labor. The goods that are produced by China are consumed by many different countries around the world and are in high demand due to the lower cost. This too has made China very successful and powerful.
The following is a link that gives a great example of comparative advantage:
Comparative advantage is the economyâ€™s ability to produce goods and services that they specialize in producing more efficiently and better quality at a lower opportunity cost and yield a stronger sales margin with higher labor cost. Whereas Absolute advantage is a theory of international trade with the ability to produce the same goods and services at a lower cost per unit and lower labor cost. When comparing comparative and absolute advantage in trade; itâ€™s clear that with absolute advantage a country can decide which product to specialize in. This way the production of goods and services are produced more efficiently at a better quality and in smaller units at lower cost per unit. Absolute advantage explains, why it would make sense for individuals or businesses to trade goods or services that they specialize in producing. Whereas comparative advantage is focused on producing goods and services of equal value but at a lower price. Comparative advantage also has a variety of factors that include cost structure, quality of products and branding.This allows the country to produce more goods and services then the other country. The advantage is that both can benefit from the production of certain services and goods. Comparative and Absolute advantages are both important concepts in international trade because they both influence the way a nation produce a particular good with limited resources. Opportunity cost comes into play with comparative advantage when there are two or more countries that produces the same product, but one can produce faster than the other, that country has opportunity cost. Comparative advantage is very useful in the sense that each country has the advantage to advance in profit. If a particular good is useful to other countries, then the tradeoff would achieve greater results for each country.Opportunity Cost has wider gaps that allows for higher levels of value in production. This is by organizing labor more efficiently with a diversity in people and skills.
I think that comparative advantage is used the most in trading because it allows each country to decide the cost of each product. With developing countriesâ€™ where the economies are growing and merging into the market, this will be a great benefit. Comparative is an advantage to other countries, because it gives the option to choose which country has the better price to trade with. Comparative advantage only works as long as the other entities have different production cost. I researched to find out which countries are trading the most product in the world. Within the top list of leading economies in the world on trade the United States was third on the list. But the United States is the largest in corn producers in agriculture with an output of 361,100.00 tones and Brazil is the largest producers of coffee in agriculture with an output of 2,246,010 tons.
Fontinelle, A. (2018, April 16). Absolute Advantage. Retrieved from https://www.investopedia.com/terms/a/absoluteadvantage.asp
Staff, I. (2018, April 15). Competitive Advantage. Retrieved from https://www.investopedia.com/terms/c/competitive_advantage.asp
Willige, A. (2016, November 30). 10 economies leading the world on trade. Retrieved from https://www.weforum.org/agenda/2016/11/top-10-global-enabling-trade-report-2016/
Said, S. (2013, April 29). The 10 Biggest Exporting Countries in the World. Retrieved from https://www.therichest.com/business/the-10-biggest-exporting-countries-in-the-world/