Explain how the theory of comparative advantage relates to the need for international business. ANSWER: The theory of comparative advantage implies that countries should specialize in production, thereby relying on other countries for some products . Consequently, there is a need for international business.
Why is comparative advantage important to countries?
The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production. Comparative advantage suggests that countries will engage in trade with one another , exporting the goods that they have a relative advantage in.
What is the basic message of the theory of comparative advantage?
– The theory of comparative advantage suggests that trade is a positive sum game in which all countries that participate realize economic gains . Even if one country has an advantage in both markets.
What role does comparative advantage play in international trade?
Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners . ... Comparative advantage suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in.
What is the importance of comparative advantage?
The benefit of comparative advantage is the ability to produce a good or service for a lower opportunity cost . A comparative advantage gives companies the ability to sell goods and services at prices that are lower than their competitors, gaining stronger sales margins and greater profitability.
What is an example of a comparative advantage?
Comparative advantage is what you do best while also giving up the least . For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing. That’s because you’ll make more money as a plumber.
What does the Heckscher Ohlin theory explain?
The Heckscher-Ohlin model is an economic theory that proposes that countries export what they can most efficiently and plentifully produce . ... It takes the position that countries should ideally export materials and resources of which they have an excess, while proportionately importing those resources they need.
What are the advantage of international trade?
One of the top advantages of international trade is that you may be able to increase your number of potential clients. Each country you add to your list can open up a new pathway to business growth and increased revenues.
Which of the following are benefits of international trade?
Increased specialisation, economies of scale , greater efficiencies in production, acquisition of needed resources, increased competition, technological advances and expanding markets, all made possible by international trade, contribute to increases in domestic output, and therefore to greater economic growth.
What is absolute advantage in international trade?
Absolute advantage is when a producer can produce a good or service in greater quantity for the same cost , or the same quantity at a lower cost, than other producers. Absolute advantage can be the basis for large gains from trade between producers of different goods with different absolute advantages.
Who has comparative advantage example?
Taking this example, if countries A and B allocate resources evenly to both goods combined output is: Cars = 15 + 15 = 30; Trucks = 12 + 3 = 15, therefore world output is 45 m units. It is being able to produce goods by using fewer resources, at a lower opportunity cost, that gives countries a comparative advantage.
What is comparative advantage and why is it important in international trade quizlet?
comparative advantage is the key to determining specialization and trade . Countries have a comparative advantage in production when they can produce a good or service at a lower opportunity cost than other producers.
Which country has comparative advantage?
For example Ireland has a comparative advantage in cheese and butter due to climate and a large amount of land suitable for dairy cows. China has a comparative advantage in electronics because it has an abundance of labor.
What are the four main sources of comparative advantage?
Comparative advantage is determined by a country’s resources, that is the land, labour, capital and enterprise .
What is the difference between absolute advantage and comparative advantage with examples?
Absolute Advantage is the ability with which an increased number of goods and services can be produced and that too at a better quality as compared to competitors whereas Comparative Advantage signifies the ability to manufacture goods or services at a relatively lower opportunity cost.
Who has comparative advantage in producing cars?
Japan has a comparative advantage in producing cars, since it has a lower opportunity cost in terms of grain given up. The United States has a comparative advantage in producing grain, since it has a lower opportunity cost in terms of cars given up.
