Competitive advantage and absolute advantage

Competitive advantage and absolute advantage are two terms that are used widely in the international trade. These terms deal with goods, production, and services. Absolute advantage occurs when a country produces particular goods at a lower cost compared to another country. Competitive advantage occurs when a country produces a particular goods at a lower opportunity cost compared to other nations (Meihami & Meihami, 2014). While absolute advantage occurs when trade is not mutually beneficial, competitive advantage in trade is mutually beneficial. Competitive advantage could also be described as the ability of a one country to produce some goods better than another nation. Comparative advantage compares the production output of the same services or goods between two countries, country might not have an absolute advantage over another nation when it produces the highest number of goods after similar resources are supplied to both countries (Méra, 2013). Country has an absolute advantage over another country when it produces the highest number of goods after similar resources are given to both nations. Absolute advantage means more services and goods in an efficient way. 

        Distinct with the absolute advantage, comparative advantage looks into the overall production of goods and services within a given period. When compared to comparative advantage, absolute advantage focuses on multiple goods. Although cost is an important factor in absolute advantage, opportunity cost is the main factor considered in comparative advantage. Distinct to absolute advantage, comparative advantage is always mutual and reciprocal. Even if one nation has an absolute advantage in producing different goods, different nations could still have different comparative advantages (Laursen, 2015). If one nation has comparative advantage over another, both parties could benefit from trading with each other since each party will receive goods at price lower than the opportunity cost of producing that good. Comparative advantage drives countries to specialise in the production of goods that they have the lower opportunity expense, leading to increased productivity. 

             If United States and Japan could produce cars, but Japan produces cars of higher quality at a faster rate, Japan has absolute advantage into the automobile industry. The absolute advantage of disadvantage in a given country plays a crucial role in the types of goods it decides to produce (Meihami & Meihami, 2014). In this scenario, the United States is better served to devote its resources and labour to another industry where absolute advantage is rather than try to compete with the more effective Japan.  

            The concentration on the production of those goods for which the resources of nation are best suited is known as specialization. With the limited resources in most nations, the choice to specialise in the production of particular goods is largely influenced but the comparative advantage. While absolute advantage focuses on the superior production capabilities of Japan versus those of United States, comparative advantage is determined by the opportunity cost (Balassa, 2014). The opportunity cost of a given product is equal to the forfeited profits that could have been gained by selecting an alternative. If the opportunity expenses of deciding to produce a given goods is lower for United States than Japan then United States is said to have competitive advantage. 

The opportunity cost for Japan’s motorcycle is lower giving it both a comparative and absolute advantage. This case example, neither of the nations can produce both items. The most effective strategy is for United States to specialise in car production since it has a comparative advantage and for Japan to produce motorcycles. International trade allow both nations to enjoy both commodities to reasonable prices since each one specialize in an efficient production of one product.    In comparison to specialization and trade, autarky economic systems do not encourage free flow of services and goods. Autarky policies are detrimental to the economic growth and the free-trade system that countries specialised in producing services and goods held an absolute advantage since it generates more wealth.  Moreover, if countries engaged in international trade through specialization in goods as indicated by the comparative advantage due to lower opportunity costs then it is guaranteed with the gains from trade for all parties regardless of the economies size involved (Meihami & Meihami, 2014). However, in the case of Japan and United States, one country would not benefit from the trade if they are importing everything and not importing anything. This occurs especially in trades between developing and developed countries where developing countries import almost all goods and services from a given country. 

               International trade require the participation from all nations. Even nations that have absolute advantage such that they have more efficient production mechanisms in all relevant goods could still profit from trade provided they have varied opportunity costs. In such cases, there is at least one good in which another nation has a comparative advantage determined by lower opportunity costs. This is because an opportunity cost of one commodity is the inverse of the other alternative commodities. This is impossible to have the lowest opportunity cost for all relevant commodities. Through specialisation of goods with lower opportunity costs, the countries involved could increase the overall level of manufacturing and split the additional output based on the individually conducted negotiations of trade. 

References

 Méra, X. (2013). Comparative Ad antage and Uncertainty Bearing.

Balassa, B. (2014). Development Strategies’. International Economics and Development: Essays in Honor of Raúl Prebisch, 159.

Meihami, B., & Meihami, H. (2014). Knowledge Management a way to gain a competitive advantage in firms (evidence of manufacturing companies). International Letters of Social and Humanistic Sciences, 3, 80-91.

Laursen, K. (2015). Revealed comparative advantage and the alternatives as measures of international specialization. Eurasian Business Review, 5(1), 99-115.