INTERNATIONAL TRADE

(EXPORT AND IMPORT)

COMPETITIVE, COMPARTIVE AND
ABSOLUTE ADVANTAGE THEORY
Exports and imports play an important role in
determining the overall health of an economy.
Countries use the data they acquire from exports and
imports to determine if they are experiencing a
surplus or a deficit. If you work in logistics, finance or
a government position that involves managing
shipments between foreign countries, understanding
how exports and imports work may benefit you. In
this discussion , we define what exports and imports
are, explore how they can influence an economy and
list several careers that involve exports and imports.
 What are exports?

Exports are the goods and services a country produces

domestically and sells to businesses or customers who reside in a
foreign country. This results in an influx of funds to the country
that is selling their goods and services. Companies may choose to
export their products and services to a foreign country because it
allows them to:
•Participate in global trade
•Access new markets
•Increase revenue
Usually companies export goods or services in areas where they
have a competitive advantage over other companies because
their product or service is superior. They may also export
commodities they produce naturally that other countries lack
based on climate and geography. For example, Jamaica, Kenya
and Columbia all have a climate suitable for growing coffee. This
helps fuel their ability to export this product to foreign countries
that can't produce coffee in their region.
 What are imports?

Imports are the goods and services a business or customer

purchases from another country. This results in an outflow of
funds from the country that is purchasing foreign goods and
services. While most countries try to export more goods and
services than they import to increase their domestic revenue, a
high level of imports can indicate a growing economy. This is
especially true if the imports are mainly productive assets, such
as equipment and machinery, since the receiving country can
use these assets to improve their economy's productivity.
For example, a paper manufacturing company in the
United States may choose to import a new machine
from Italy because it is more cost effective than
building the machine themselves or purchasing it from
a domestic supplier. Once manufacturers install the
machine, it may increase the manufacturing company's
ability to produce paper products, thus increasing their
revenue and ability to export more of their goods in the
future.
Why are exports and imports important?
Exports and imports are important because together
they make up a country's balance of trade, which can
impact an economy's overall health. In a healthy
economy, both imports and exports see continual
growth. This usually represents a sustainable and
strong economy. When exports and imports become
unbalanced, it can cause either a trade surplus or a
trade deficit.
What are the advantages of import?
The benefits of import include giving developing nations a chance to
boost their economy, producing higher quality products , and
increasing revenue by introducing a new product to a locale. Imports
allow greater diversity in the market for shoppers and residents of
specific countries,…
 What is difference between export and import?
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.
What is import and export in simple words?
Importing and Exporting are means of Foreign Trade.
Exporting refers to the selling of goods and services from the home
country to a foreign nation. Whereas, importing refers to the
purchase of foreign products and bringing them into one’s home
country.
A trade surplus occurs when a country's exports are
greater than its imports. This means that there is a net
inflow of domestic currency from foreign markets. A trade
surplus typically indicates a healthy economy. A trade
deficit occurs when a country's imports are greater than
its exports. This means that there is a net outflow of
domestic currency to foreign markets.
A trade deficit can occur when a country lacks the
capacity to produce its own products due to:
•Lack of skill
•Low resources
•Preference to acquire products from another country
that can produce them cheaper
To fully understand the role exports and imports play in
economics, it can be helpful to learn how they influence
a country's gross domestic product (GDP), exchange
rate, level of inflation and interest rates. Here is some
more information on each of these topics:
Gross domestic product
A country's gross domestic product (GDP), also
referred to as its national income, is the gross market
value of the total goods and services it produces during
a set time period. GDP is one of the most common
metrics used to track the overall health of a nation's
economy because it can help determine if an economy
is growing or experiencing a recession. To calculate
GDP, first determine the net export by subtracting the
total imports from the total exports:
Net export = total exports - total imports
A positive net export indicates a trade surplus, while a negative
net export indicates a trade deficit. You can then use the
following formula to identity a country's GDP:

GDP = consumer expenditure + investment expenditure +

government spending + net export
In this equation, consumer expenditure refers to private
household expenditures, including durable goods, non-durable
goods and services. Investment expenditure refers to the money
domestic businesses invest in equipment and upgrades.
Government spending accounts for the sum of government
expenditures on final goods and services.
Exchange rates
An exchange rate is the current value of a country's
currency compared to the value of another country's
currency. A nation's exchange rate and its exports and
imports are closely related. If a country has a weak
domestic currency that is worth less than the currency
in foreign countries, it can stimulate exports and make
imports more expensive. If a country has a strong
domestic currency that is worth more than the
currency in other countries, then the opposite is true:
the country may see a decrease in exports and an
increase in imports.
Inflation levels and interest rates
Inflation measures the rate of increase in the general
price of selected goods and services over a set period
of time. A high inflation level typically results in higher
interest rates. This can result in an increase in imports
and a decrease in exports because it becomes more
cost effective to purchase goods from foreign
countries than to purchase goods domestically.
Tracking these trends can help financial experts
forecast economic changes, which they can use to
predict quarterly or annual GDP growth rates and
inform investors.
Examples
Here are some examples of how exports and imports
can affect the overall health of a country's economy:

Example of a trade surplus

If China exported $1 trillion worth of goods in 2019 and
imported only $200 billion worth of goods during that
same year, they would have a trade surplus of $800 billion.
This is because China exported more goods than it
imported during 2019, resulting in an influx of funds to
their country.
Example of a trade deficit
If the United States imports $1.68 trillion in goods this
year and exports $1.12 trillion in goods during the same
time period, this creates a trade deficit of $565.6 billion.
This is because the United States imported more goods
than it exported, resulting in an excessive outflow of funds.
 What Is Comparative
Advantage?
(Benefits and Comparisons)
Comparative advantage can allow a company to increase its
profitability and efficiency as it relies on resources and lower
labor costs in a foreign country to lower goods and materials
expenses. You may work for a company with a comparative
advantage, but that doesn't mean the company or country is
the best at creating the product or service. Understanding
this advantage and the benefits it potentially creates for
companies can help you contribute to a company's
productivity.

In this discussion , we discuss comparative advantage and its

importance, benefits and challenges and compare it to other
types of advantages in business.
Key point:

1. Comparative advantage is when a company can produce

products or services at a lower cost than its competitors.

2. Companies can experience several benefits with a comparative

advantage, such as getting access to new markets and
stimulating economic growth.

3. Comparative advantage differs from a competitive advantage

in that the latter is when a company can offer consumers a
product or service of better value.
What is comparative advantage?
Economist David Ricardo developed comparative advantage,
which refers to a company's ability to produce goods and
services at a lower cost than others. The principle of
comparative advantage is when a country has a specialization in
producing goods or services at a lower cost than others may
produce in their own country, so it can sell its surplus to its
international trading partners. While comparative advantages
typically occur in goods, telecommunication technology also
makes it easier to export services, such as call centers and
financial services.
Why is comparative advantage important?
The benefit of comparative advantage is the ability to produce a
good or service at a lower opportunity cost. A comparative
advantage gives companies the ability to sell goods and services
at reduced prices than their competitors, gaining stronger sales
margins and greater profitability.
Here are some other reasons comparative advantage is
essential:
1. International business: By engaging in trade with foreign
countries with a comparative advantage in producing
specific goods or services, companies can enter new
markets and create job opportunities in both countries,
boosting local economies.
2. Access for consumers: This business practice can
encourage companies to price items lower, allowing some
consumers access to products they may not afford
otherwise.
3. Reallocated funds: Companies can use the money they
save on producing their goods and services to improve the
company in other areas, such as increasing employee
wages or improving the work environment.
 Benefits of comparative advantage
There are a few benefits of comparative advantage for
companies taking part in international trade, including:

1. Diversification of products and services: Companies

can diversify their products and services, which can
reduce their dependence on one market or product and
help to mitigate the risk of economic downturns.
2. mproved quality of products and services: Businesses may
access new technologies, ideas and best practices from other
countries, which can improve the quality of their products and
services, making them more competitive.
3. Access to new markets: Organizations may have access to
new markets, which can help increase their customer base and
sales.
4. Stimulation of economic growth: Corporations can
stimulate economic growth by creating jobs, promoting
innovation and increasing the exchange of goods and services
between countries.
4. Lower opportunity costs and higher profit margins: Nations
or companies with a comparative advantage can focus their
labor, capital and resources on production that requires a lower
opportunity cost and therefore achieve higher profit margins.
5. Increased efficiency: Companies choose to specialize their
production of goods or services they can make more efficiently
and then purchase what they can't create from trading partners.
6. Absolute and competitive advantages: Companies engaging
in commerce do so to capitalize on advantages, which may gain a
competitive or absolute advantage.
 Challenges of comparative advantage

Earning a comparative advantage may not be the goal of some

organizations. Here are some challenges of comparative
advantage when engaging in international trade:
• Cultural differences: Companies may face cultural differences
that can create challenges, such as communication, negotiation
and business practices. Although experiencing cultural
differences may create challenges, it can also generate learning
opportunities to understand how different countries operate in
business and use your new knowledge to apply it to your role.
• Political and economic instability: A business can have
exposure to political and economic instability in other countries,
which can create risks to their operations and investments when
participating in international trades. To deal with this issue, you
can learn more about a country's politics and economics before
investing to understand the potential risks and how to minimize
them.
•Intellectual property rights: Companies may experience
challenges in protecting their intellectual property rights, such
as patents, trademarks and copyrights, in other countries. To
minimize this risk, learn about protecting intellectual property
rights in different countries to understand how their legal
systems differ from the U.S.
•Labor and environmental standards: Companies might
encounter challenges ensuring their suppliers and trading
partners adhere to labor and environmental standards. You
can reduce this risk by implementing standards that suppliers
and partners are required to adhere to when working with
your employer.
• Exchange rate fluctuations: Companies can have exposure
to exchange rate fluctuations, which can affect the profitability
of their operations and investments. To avoid this, consider
investing in countries with stable currencies or hedged
investments, which helps offset financial risks with other
countries.
• Competition with domestic companies: Organizations may
experience competition from domestic companies, which can
make it more difficult to sell their goods and services in their
home market. This can create an opportunity for companies to
learn how to market their products and services to their target
audience, including advertising how they differentiate from
their competitors and up-selling their consumers.
• Restricted trade: If a country removes itself from an
international trade agreement or a government imposes tariffs, it
may create complications for the companies relying on those
countries for resources. To deal with this challenge, you may
choose a different market without the economic sanctions or wait
if it's likely the country may remove the restrictions.
• Outweighed costs: While the cost of materials and labor
overseas may be cheaper than manufacturing them in the same
country, the savings may not be enough to outweigh the cost of
transport, and, in some cases, transportation costs may outweigh
any comparative advantage. To reduce this challenge, you can
create various financial budgets and calculations to determine if
the savings outweigh the additional costs.
• Scaling difficulties: If the products and services
require specialized labor and skills, it may be difficult to increase
the organizational size or output, as employees with those
specialized skills can be challenging to find. This can create an
opportunity for increased networking to find talented and long-
term employees.
 Comparative vs. absolute advantage

Absolute advantage is when a company is the best and most

efficient at doing something and can produce better or more
goods and services than someone else. For example, countries
with rich farmland and natural resources have an absolute
advantage in agriculture. However, this doesn't mean they also
have a comparative advantage. With comparative advantage, a
company has the lowest opportunity cost, not necessarily the
ability to produce products or services at a greater volume or
better quality.
To understand opportunity cost, consider the example of a
lawyer and paralegal. The lawyer is the best at producing legal
services and is also a faster typist, giving them the absolute
advantage in both cases. The lawyer can charge $150 per hour
for legal services, whereas the paralegal charges $25 per hour
for typing services. If the lawyer were to spend a day typing, the
opportunity cost for what they might lose not giving legal advice
can be high, and they can pay the paralegal $25 per hour to type
briefs.
 Comparative vs. competitive advantage
A competitive advantage is when companies offer something of
better value to customers than their competitors. When
companies focus on having the lowest cost to earn a competitive
advantage, they likely also seek a comparative advantage.
Though a company may have a comparative advantage without
earning a competitive advantage, so the two aren't exclusive to
each other. Earning a competitive advantage can be a more time-
consuming process than obtaining a comparative advantage, as
companies gain competitive advantages by monitoring the
process of other businesses, which requires extensive market
research.
Many companies focus on three strategies:
• Offering the best product
• Having the lowest cost
• Delivering for a niche market
To understand competitive advantage further, consider the
example of a company in the United States that produces
organic, locally sourced food products, like a bushel of corn. The
company may not have a comparative advantage in terms of
production costs, but since it's organic and locally sourced, it can
offer a product of better value to customers and have a
competitive advantage over similar companies in the market.