The Essay On Comparative Advantage And International Trade.

The world of international business is complex and contested. It is also changing rapidly. These changes apply to international business and the frameworks and structures of businesses themselves, and the way we understand them. Your task is to take a current theory of international business, apply it to an industry and to also explain the institutional structure and recent history of that industry, in terms of key firms, industry structure, global production and marketing orientation, ownership and financing as well as government and other civil society groups regulation, monitor or contest those industries. Once you have undertaken the industry profile you are then challenged to assess the ways that theories of international business helps us to understand the industry, its history and trends, and where it doesn't.

1. Your task is to take a current theory of international business, and apply it to an industry and its key corporations.

2. and to also explain the institutional structure and recent history of that industry, in terms of key firms, industry structure, global production and marketing orientation, ownership and financing as well as government and other civil society groups regulation, monitor or contest those industries.

3. Once you have undertaken the industry profile you are then challenged to assess the ways that theories of international business helps us to understand the industry, its history and trends, and where it doesn't.

4. The written report should blend analytical writing, weighing of historical and contemporary data, and set them against the theoretical framework you have chosen.

Business operations across borders remain one of the most challenging yet interesting ventures in the globe. The hurdle involved in international trade at times makes it hard especially for the developing countries to fully achieve their business objectives. For instance, when the government taxes become high, the extent to which a country can export and import products is equally affected (Bernhofen, 2015). At the same time, countries which are more technologically advanced have higher efficiency levels especially due to the use of machinery in production. This in turn impacts the costs of production and eventually the amount of goods and services that the nation is able to present for international trade. There are various theories of international trade including: trade theory, theory of comparative advantage, and mercantilism and porter diamond theory just to mention but few. It is a fact worth mentioning that each of these theories offers a vast perspective of the aspect of international trade hence enabling a clear understanding of the origin of some of the current trends. This paper however picks on one theory which is the theory of comparative advantage. The analysis of this theory shall be pegged on the electronics industry by noting how the countries dealing in the production of electronic gadgets and equipment have been coping in their trade with one another and with other countries. The discussion shall equally highlight the historical context of the comparative advantage theory, the aspects which led to its formulation and consideration as well as the nature of criticism which have been directed at the theory (Bernhofen and Brown, 2016).

The theory of comparative advantage largely works on the basis of both opportunity and marginal costs. When a country is able to produce a given product my incurring relatively lower costs, then the country is said to have a comparative advantage over another. This comparison becomes more eminent when the other country tends to incur a lot of costs in production. For instance, China is a one of the leading producers of cars, trucks as well as electronic appliances which include household goods.  The cost of producing these goods in the country is relatively lower. This is an aspect which could be associated with the relatively high level of technological development and presence of machinery in the country. On the other hand, Australia equally produces cars and other electronic appliances. However, Australia incurs a higher cost of production mainly as a result of the fewer raw materials available for this particular industry. As a result, Australia may choose to export to china some of the goods which are readily available in exchange for the raw materials needed for the electronic industry in the country. Given the fact that Australia is a country that is rich in natural resources, it mainly exports agricultural products and energy in the form of liquefied gas and coal (Dixit and Norman, 2010). The two countries can involve in international trade such that China exports the electronics and cars to Australia due to the fact that the country is comparatively advantaged. In return, Australia exports natural gas and agricultural products to China. The gain that comes out of this arrangement is then referred to as a trade gain. The illustration above distinctly defines the theory of comparative advantage by bringing out the clear picture that there is the presence of a mutual gain between the two countries in the process of the international business.

Historical context of the theory

Despite the fact that the theory has been mention in Adam Smith’s Book “The Wealth of Nations” the origin of the theory has been largely associated with David Ricardo. According to Adam Smith, if it is possible to import a product from another country at a rate that is cheaper than the cost of producing the same good internally, then it would only be prudent to buy it from outside rather than produce the good internally  (Dornbusch and Samuelson, 2010).  The principal of comparative advantage is however believed to have been formulated by Ricardo in 1817 in his book titled “The Principals of Political Economy and Taxation.” In this book, he distinctly addresses the theory using a comparison between England and Portugal. He gave an analogy concerning the products produced by the two countries. While each produced both wine and cloth in almost equal measure, Ricardo noted that the number of hours required in producing these products differed from one country to another. This difference could be associated with variations in efficiency as well as the availability of labor. Due to the higher efficiency level in Portugal, it possesses an absolute advantage in the production of cloth. On the other hand, England is able to produce the same product but at a lower opportunity cost hence the country is said to have a comparative advantage. Basing the comparison on the two products, Ricardo highlighted that Portugal exhibited more efficiency in the production of cloth than wine. At the same time, England was notably more efficient in the production of wine than cloth. The two countries taking part in the free market, trading on goods for which they had a comparative advantage would lead to a general increase in the production of the good and subsequently a gain by both parties.

In line with the historical context of the theory, it can be established that the period around its formulation which the very duration in which slave trade was at its best. This leads to the concept of availability of labor as the slaves were basically used in almost all the procedures in the industries. They were in the farms preparing the raw materials and also right inside the machinery which during the time were manually operated. As a result, efficiency in the historical context of international business was not necessarily based on machinery and technological know-how but on the availability of labor as provided by the slaves. For instance, both Portugal and England were active in slave trade (Golub, 2009). The number of hours taken to produce both cloth and wine was majorly pegged on the number of workers who were available for the processes at a given time. This therefore implies that an increase in the number of slaves led to an increase in the number of workers and hence a reduction in the total duration of production. The other fact which could be highlighted with respect to the history of this theory is the aspect that during this time, transactions were not purely monetary but barter trade was eminent. International business therefore involved the direct exchange of good hence a country would gain more by exporting or supplying good which they would easily or cheaply produce in exchange for those that they were not efficiently able to produce. It would equally be a point worth noting that the theory was put forward in a bid to disseminate the theory of absolute advantage whose proposition never gave a good enough environment for international business. One bad attribute about absolute advantage is the fact that a country which has it is likely to exercise excessive control over the international market while giving little room for the development of other nations. The theory of comparative advantage was therefore instrumental at giving international business a better perspective by pointing out the possibilities for free and fair trade accompanied with mutual gains (Krugman and Obstfeld, 2008).

How comparative advantage works

The theory tried to explain the reason behind the increasing good performance in the international levels for some countries in comparison to the others. The nations were not at all developed as much but there are aspects which made one nation have a competitive edge over the other. It is through these edges that international trade was possible. Through this theory, it has been possible to answer the question as to why certain countries were and have been able to export certain products while importing others. It is practically impossible to have a country wield absolute advantage in product exportation majorly due to the dynamic nature of the corporate international environment. The various comparative advantages that countries have over each other have kept international trade alive and possible.

According to the theory of Comparative advantage, countries which have a comparative advantage in a particular area ought to maintain specialization in the same area. For instance, a country with a comparative advantage in the exportation of agricultural products ought to remain specialized in the same area while importing high technology devices for which they lack the same advantage. This principle has attracted criticism from various economic perspectives. As pointed out by Ha-Joon Chang who is an economist, the principle allows the developed countries to maintain this edge which usually comes at the expense of the developing countries. In line with the components of this principle, the economist also argues that the developed countries not only use interventionist policies but equally apply protective approaches in a bid to stay rich. These strategies effectively hinder other developing nations from experiencing the same gain. The fact that applying this principle retains a country at a given status while diminishing the ability of the other countries to come up in the international levels remains one of the greatest criticisms of this theory (Maneschi, 2008).

International business in the past is characterized by a number of similar facts. On the other hand, it is equally worth to note that some of the facts tend to differ due to the changing structure of the corporate world and international business. The theory relies upon the principles of efficiency and opportunity cost as a crucial determinant in international business. Despite the fact that these elements were vital in the past, they are considerably essential even in the current international trade realms. Based on the example of Portugal and England which is a historical phenomenon, it can be deduced that that Portugal would export cloth because it had a comparative advantage in this area. The comparative advantage was caused by the efficiency levels as well as the low opportunity costs involved. England on the other hand would trade wine due to the high efficiency levels involved. Similar aspects can be traced to the current trends in international business as countries still prefer to export or supply goods which they can cheaply produce while importing those that are expensive to produce locally. For instance, most African countries have a comparative advantage in agriculture and have been key exporters of agricultural products especially to the developed countries (Maneschi, 2008). On the other hand, the high level of infrastructure and technology in the developed countries has given them a comparative advantage in technological equipment like computers and phones which have been supplied to the developing countries in Africa. This illustration reveals a similarity in both the past and current facts. In both the historical and current scenarios, it is clear that countries are keen on engaging in international business with a good return on investment at a relatively low cost. The ability to create a balance in the supply and reception of goods based on the principle of comparative advantage is therefore a major element in the definition of economic capabilities in countries.

Criticism of the theory

However, there is notable difference in facts while looking at the theory from both the present and past perspectives. In the past, efficiency was basically based on labor as well as the availability of raw materials. This is because there was no much use of machinery due to the low level of technology at the time. The current trend is totally a different picture since the rise in technology has given efficiency a whole new meaning. Countries in the current world tend to have comparative advantage due to the availability of technology which encourages the use of machinery hence increase in efficiency (Nunn, 2008). For instance, developed countries like The United States and United Kingdom have incorporated technology which has offered them a high comparative advantage over developing countries. This indicates a difference while looking at the theory from a historical perspective where efficiency was mainly defined by the number of workers who were present for a particular process.

These changes have come with a number of implications with reference to the principles of comparative advantage. The high level of technology in developed countries has placed them at relatively higher economic levels compared to the countries that are not in this position as yet. On the other hand, the developing countries with comparative advantage in products which have a lower value have largely hindered the economic advancement of these countries. This therefore explains why the developed countries continue to thrive while the developing one keeps struggling to create a stable economic balance. The value of technological products including electronics, cars, computers and phones is definitely higher than that of agricultural products. As a result, it has become hard to create a conducive economic environment for participating countries despite the fact that the business takes place at the same level. This has led to massive deficits hence to maintain their economic standards; most developing countries have resorted to borrowing from their developed counterparts (Maneschi, 2008). This scenario gives international business based on the theory of comparative advantage a lesser meaning due to the fact that the gain here is one sided. The original stipulation of the theory indicated a mutual gain by both countries hence the aspect of a one sided gain indicates a negative economic effect on the developing countries as a result of the transition from the past to the present world.

The theory of comparative advantage, just like many other theories of international business gives one a deeper perspective of the dynamics that characterize international trade. The analysis of the theory reveals a crucial link between the economic status of a country and its ability to participate in international trade. Gauging by both the historical and current facts, it can be established that for a country to comfortably engage in the dynamics of international trade, it must have something to present to the table, this implies the nation ought to be endowed economically in one way or the other. The endowment may be defined by various elements like labor, machinery, raw materials and infrastructure just to mention but few. It is however important to note that the variations in the economic levels of countries are what the comparative advantage constitutes.

Conclusion

One of the strengths of the theory is its profound explanation of the aspect of trade gains at international levels. The theory is instrumental in revealing a better understanding of why some countries tend to thrive in the international business arena more than others. The other strength of the principle is the fact that it encourages mutual gain between the parties involved in the trade. However, there are weaknesses which can be associated with this principle. For instance, the theory fails to explain a specific balance especially in scenarios where the participating countries are separated by huge margins in their economic levels. Based on the theory, successful countries may continue registering success in the international business fonts at the expense of countries with low economic levels (Stern, 2012). There therefore a need to create policies which encourage almost equal gains for both countries irrespective of their economic status.

Conclusion

This paper highlighted the aspect of international business based on the theory of comparative advantage. From the discussion, it has been possible to establish the definition as well as the origin of the theory. By explaining the various elements of the theory, it emerged that efficiency and opportunity costs are crucial determinants in international business. Countries there supply goods which they can efficiently produce at relatively lower costs (Zimring and Etkes, 2014). Comparing the theory based on historical and current perspectives has also enabled an understanding of the origin of current economic trends especially in the field of international business.

References

Bernhofen, M. and Brown, C. (2009). A Direct Test of the Theory of Comparative Advantage: The Case of Japan. Journal of Political Economy. 112 (1), pp. 48–67.  

Bernhofen, M. and Brown, C. (2015). An Empirical Assessment of the Comparative Advantage Gains from Trade: Evidence from Japan. American Economic Review. 95 (1), pp. 208–25. 

Bernhofen, M. (2015). Gottfried haberler's 1930 reformulation of comparative advantage in retrospect. Review of International Economics. 13 (5), pp. 997–1000 

Bernhofen, D. and Brown, C. (2016). Testing the General Validity of the Heckscher-Ohlin Theorem. American Economic Journal: Microeconomics. 8 (4), pp. 54–90. 

Dixit, A.  and Norman, V. (2010). Theory of International Trade: A Dual, General Equilibrium Approach. Cambridge: Cambridge University Press.

 Dornbusch, R. and Samuelson, A. (2010). Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods. American Economic Review. 67 (5), pp. 823–39.

Golub, S. (2009). Classical Ricardian Theory of Comparative Advantage Revisited. Review of International Economics. 8 (2), pp. 221–34

Krugman, P. and Obstfeld, M. (2008). International Economics: Theory and Policy. New York: Prentice Hall.

Maneschi, A. (2008). Comparative Advantage in International Trade: A Historical Perspective. Cheltenham: Prentice Hall.

Nunn, N. (2008). Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade. Quarterly Journal of Economics. 122 (2). pp. 569–600. 

Stern, M. (2012). British and American productivity and comparative costs in international trade. Oxford Economic Papers. 2(1), pp. 275–96.

Zimring, A. and Etkes, H. (2014) When Trade Stops: Lessons from the 2007–2010 Gaza Blockade. Journal of International Economics, forthcoming. 2(1), pp. 275–96.