The Drive for International Trade

Competitive Advantage

Competitive advantage is defined as the strategic advantage one business entity has over its rival entities within its competitive industry.

Learning Objectives

Differentiate between the theories of competitive advantage and comparative advantage

Key Takeaways

Key Points

  • A country is said to have a comparative advantage in the production of a good (say cloth) if it can produce cloth at a lower opportunity cost than another country.
  • Competitive advantage seeks to address some of the criticisms of comparative advantage.
  • Competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors.

Key Terms

  • comparative advantage: The concept that a certain good can be produced more efficiently than others due to a number of factors, including productive skills, climate, natural resource availability, and so forth.
  • Opportunity cost: The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the most valuable forgone alternative.

Competitive advantage is defined as the strategic advantage one business entity has over its rival entities within its competitive industry. Achieving competitive advantage strengthens and positions a business better within the business environment.

Competitive advantage seeks to address some of the criticisms of comparative advantage. A country is said to have a comparative advantage in the production of a good (say cloth) if it can produce cloth at a lower opportunity cost than another country. The opportunity cost of cloth production is defined as the amount of wine that must be given up in order to produce one more unit of cloth. Thus, England would have the comparative advantage in cloth production relative to Portugal if it must give up less wine to produce another unit of cloth than the amount of wine that Portugal would have to give up to produce another unit of cloth.

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Competitive Advantage: The 640GB drive has a competitive advantage over the 500GB drive in terms of both cost and value.

Michael Porter proposed the theory of competitive advantage in 1985. The competitive advantage theory suggests that states and businesses should pursue policies that create high-quality goods to sell at high prices in the market. Porter emphasizes productivity growth as the focus of national strategies. This theory rests on the notion that cheap labor is ubiquitous, and natural resources are not necessary for a good economy. The other theory, comparative advantage, can lead countries to specialize in exporting primary goods and raw materials that trap countries in low-wage economies due to terms of trade. The competitive advantage theory attempts to correct for this issue by stressing maximizing scale economies in goods and services that garner premium prices.

Competitive advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources, such as high grade ores or inexpensive power or access to highly trained and skilled personnel human resources. New technologies, such as robotics and information technology, are either to be included as a part of the product or to assist making it. Information technology has become such a prominent part of the modern business world that it can also contribute to competitive advantage by outperforming competitors with regard to Internet presence. From the very beginning (i.e., Adam Smith’s Wealth of Nations), the central problem of information transmittal, leading to the rise of middle men in the marketplace, has been a significant impediment in gaining competitive advantage. By using the Internet as the middle man, the purveyor of information to the final consumer, businesses can gain a competitive advantage through creation of an effective website, which in the past required extensive effort finding the right middle man and cultivating the relationship.

Absolute Advantage and the Balance of Trade

Absolute advantage and balance of trade are two important aspects of international trade that affect countries and organizations.

Learning Objectives

Explain the principles of absolute advantage and balance of trade

Key Takeaways

Key Points

  • Absolute advantage: In economics, the principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources.
  • Net exports: The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation’s imports and exports.
  • Advantageous trade is based on comparative advantage and covers a larger set of circumstances while still including the case of absolute advantage and hence is a more general theory.

Key Terms

  • advantageous: Being of advantage; conferring advantage; gainful; profitable; useful; beneficial; as, an advantageous position.
  • Absolute advantage: The capability to produce more of a given product using less of a given resource than a competing entity.

In the drive for international trade, it is important to understand how trade affects countries positively and negatively—both how a country’s imports and exports affect its economy and how effectively the country’s ability to create and export vital goods effects the businesses within that country. Absolute advantage and balance of trade are two important aspects of international trade that affect countries and organizations.

European Free Trade Association insignia.

European Free Trade Agreement: The European Free Trade Agreement has helped countries trade internationally without worrying about absolute advantage and increased net exports.

Absolute Advantage

In economics, the principle of absolute advantage refers to the ability of a party (an individual, a firm, or a country) to produce more of a good or service than competitors while using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything; in that case, according to the theory of absolute advantage, no trade will occur with the other party. It can be contrasted with the concept of comparative advantage, which refers to the ability to produce a particular good at a lower opportunity cost.

Balance of Trade

The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports in an economy over a certain period. A positive balance is known as a trade surplus if it consists of exporting more than is imported; a negative balance is referred to as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance.

Importing and Exporting

Nations export products for which they have a competitive advantage in order to import products for which they lack a competitive advantage.

Learning Objectives

Explain the difference between imports and exports

Key Takeaways

Key Points

  • Exports refers to selling goods and services produced in the home country to other markets.
  • Imports are derived from the conceptual meaning, as to bringing in the goods and services into the port of a country.
  • An import in the receiving country is an export to the sending country.

Key Terms

  • capital goods: Produced goods that are chiefly used in production of further goods, in contrast to the consumer goods

In International Trade, “exports” refers to selling goods and services produced in the home country to other markets. Any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Export goods or services are provided to foreign consumers by domestic producers. The buyer of such goods and services is referred to an “importer” who is based in the country of import, whereas the overseas-based seller is referred to as an “exporter. ” Thus, an import is any good (e.g., a commodity) or service brought in from one country to another country in a legitimate fashion, typically for use in trade. It is a good that is brought in from another country for sale. Import goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country.

When a country, South Africa for example, sells its products to other countries, we call it exporting, and when South Africa buys goods from other countries, we call it importing. South Africa exports mainly primary products, such as products from mining (gold, diamonds, platinum, manganese, chromium, coal, iron ore, and asbestos), and agricultural products, such as wool, sugar, hides, and fruit. South Africa purchases capital goods, such as machinery, computers, and electronic products, from other countries. The money that is earned through exports is used to pay for imported products and in this way, the numerous needs of South Africans are satisfied.

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Container Ship in Kaoshiung Habor, ROC: Exporting raw materials accounts for the funds spent on importing finished goods.