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VIDEO: °@\@
COMPARATIVE ADVANTAGE AND TRADE
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Goals:

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• Discuss globalization of markets, economies, and jobs.
• Explain international trade, foreign direct investments, and global monetary systems

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Watch this video online:@ @ _ °
https://youtu.be/38hvvAzgXZY

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• Comparative Advantage and Trade. Authored by
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Project: Z Degree Program. License

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READING: COMPETITIVE ADVANTAGE

Competitive advantage is dePned as the strategic advantage one

business entity has over its rival entities within its competitive
industry.

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.

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.

Examples

• Opportunity cost – The opportunity cost of cloth production is defined as the amount of wine for example,
that must be given up in order to produce one more unit of cloth.

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.

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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.

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.

GLOSSARY

Business environment

The system within which companies exist.

Consumer

Someone who acquires goods or services for direct use or ownership rather than for resale or use in
production and manufacturing. The consumer is the one who pays to consume the goods and services
produced. As such, consumers play a vital role in the economic system of a nation. In the absence of their
effective demand, the producers would lack a key motivation to produce, which is to sell to consumers.

Economy

Collective focus of the study of money, currency and trade, and the efficient use of resources. The system of
production and distribution and consumption. The overall measure of a currency system; as the national
economy.

Exporting

The act of selling to a foreign country the sale of capital, goods, and services across international borders or
territories.

Good

An object produced for market.

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 Industry

The sector of the economy consisting of large-scale enterprises.

Lead

Potential opportunity for a sale or transaction, a potential customer.

Leading

To conduct or direct with authority the management function of determining what must be done in a situation
and getting others to do it.

Market

A group of potential customers for one’s product. One of the many varieties of systems, institutions,
procedures, social relations and infrastructures whereby parties engage in exchange.

Premium

Bonus paid in addition to normal payments. The price above par value at which a security is sold. Something
offered at a reduced price as an inducement to buy something else. The amount a policy-holder or his
sponsor must pay to a health plan to purchase health coverage.

Price

The price is the amount a customer pays for the product. The quantity of payment or compensation given by
one party to another in return for goods or services. The cost required to gain possession of something.

Product

Any tangible or intangible good or service that is a result of a process and that is intended for delivery to a
customer or end user. Anything, either tangible or intangible, offered by the firm as a solution to the needs and
wants of the consumer; something that is profitable or potentially profitable; goods or a service that meets the
requirements of the various governing offices or society.

Licensing & Attributions

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READING: ABSOLUTE ADVANTAGE

GOALS

By the end of this section, you will be able to:

• Discuss globalization of markets, economies, and jobs.
• Explain international trade, foreign direct investments, and global monetary systems.

9
Absolute advantage and balance of trade are two important
aspects of international trade that a[ect countries and
organizations.

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: 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.

Terms

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

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 exportvital 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 Agreement

The European Free Trade Agreement has helped countries international trade without worrying about absolute
advantage and increases 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 ofexporting 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.

GLOSSARY

Balance of trade

10
 The difference between the monetary value of exports and imports in an economy over a certain period of
time.
Comparative advantage
The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over
another. 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.

Economy

Collective focus of the study of money, currency and trade, and the efficient use of resources.The system of
production and distribution and consumption. The overall measure of a currency system; as the national
economy.
Export
To sell (goods) to a foreign country. Any good or commodity, transported from one country to another country
in a legitimate fashion, typically for use in trade.
Exporting
The act of selling to a foreign country the sale of capital, goods, and services across international borders or
territories.
Good
An object produced for market.
Input
Something fed into a process with the intention of it shaping or affecting the outputs of that process. Each
participant’s contributions that are viewed as entitling him/her to rewards or costs. Examples include time,
effort, and loyalty.
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. The cost of any activity measured in terms of the value of the next best
alternative forgone (that is not chosen). The value forfeited by taking a particular route.
Output
Production; quantity produced, created, or completed. data sent out of the computer, as to output device such
as a monitor or printer.
Productivity
Productivity is a measure of the efficiency of production and is defined as total output per one unit of a total
input. The rate at which goods or services are produced by a standard population of workers. A ratio of
production output to what is required to produce it (inputs). The state of being productive, fertile, or efficient.
The rate at which products and services are produced relative to a particular workforce.
Resource
Something that one uses to achieve an objective, e.g. raw materials or personnel.
Services
That which is produced, then traded, bought or sold, then finally consumed and consists of an action or work.
Trade deficit
A negative balance of trade.
Trade surplus
A positive balance of trade.
Value
The degree of importance given to something. A value is extremely absolute or relative ethical value, the
assumption of which can be the basis for ethical action. A customer’s perception of relative price (the cost to
own and use) and performance (quality)
Values
A collection of guiding principles; what one deems to be correct and desirable in life, especially regarding
personal conduct.

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