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Alternatively, it could be assumed that various resources are required but that they can be represented and measured by means of a "composite resource".
Because of comparatively i. The concept of comparative advantage has to be distinguished from that of absolute advantage, which indicates that the country in question uses in absolute terms fewer resources in the production of the given commodity.
Thus, in our example, the United States has an absolute advantage in the production of both chips and sugar and a comparative advantage in the production of chips only. The basic tenet of the comparative cost theory is that the gains from trade arise from the existence of a comparative cost advantage and not of an absolute cost advantage.
Comparative advantage may need to be created Third, the theory is static. It explains trade and trade gains on the basis of comparative advantage at a certain point in time. It may be the case that comparative advantages change and can be acquired over time through, inter alia, policy action.
In that case, having a comparative advantage in one good would not necessarily imply that a country should specialize in the production of that good at the expense of other lines of production.
In fact, new industries so-called infant industries may not have a comparative advantage when they are being established and, as we will see below, may need to be protected until they achieve the size required to benefit from economies of scale.
Thus, in our example, Brazil would not necessarily commit itself to the production of sugar, totally forgetting about computer chips, if it felt it had the basis for developing a viable chip industry in the longer term.
This kind of reasoning in fact led Brazil to put trade barriers to the import of computer equipment with the intention to develop over time some advantage in the domestic production of computers.
Note, of course, that trade policy may not be the most effective way of developing an indigenous industrial capacity if more direct industrial policies are available. Countries may also lose comparative advantage in certain types of production as technology evolves abroad the so-called sunset industries issue.
In addition, world prices change over time, impacting on a country's comparative advantage. Some qualifications on the theory of comparative costs The theory assumes that resources are fully utilized, i.
Thus, if there are idle resources, there is no need to decrease the production of sugar to increase that of chips or vice versa. It assumes that resources can easily be reallocated to those activities in which a country has comparative advantage.
In the real world, there are a number of constraints which may make it difficult to reallocate resources. Thus there are potentially high adjustment costs in moving from one line of production to another, e.
The capital used in sugar factories cannot be used for chocolate production and workers have to be trained to use a different technology. In the classical model, investment resources are not internationally mobile only commodities can move and investment decisions are taken on a national basis.
In today's world, capital is highly mobile across national boundaries, and so is technology. Furthermore, the decision-making framework for a growing part of world investment is international and not national. A large investment fund or a transnational corporation are not restricted by national boundaries; they search for profit opportunities anywhere in the world - a concept closer to that of absolute than to comparative advantage.
Factors determining investment location, and therefore trade flows, are lower labour costs, availability of natural resources and distance to raw material and major markets, as well as opportunities for establishing an efficient marketing and distribution set-up.
The theory of comparative advantage is mostly concerned with the efficient use of resources for producing a limited number of very homogenous commodities. Today, the quality and the volume that can be delivered by a particular supplier is often more important than the cost.
In a sense, the capacity to sell is becoming more important than the capacity to produce. Trade has important distributional effects Fourth, the theory shows that countries as a whole gain from trade but makes no reference to whether and how different groups within each country benefit or lose from trade.
As we will see below, trade can have important impacts on income distribution and this adds a social dimension to the trade issue. It is precisely because of trade's potentially negative impact on the incomes of certain groups that the United States has traditionally protected its sugar industry, restricting the imports of this product through a quota system.
Economies of scale Trade allows scale economies to be achieved Another reason why trade can increase efficiency is because it allows an expansion of the market for a certain industry beyond the limits of the domestic economy.
Through exports, the output of the industry can expand and, if there are economies of scale, the average cost of the industry's products will fall.
There are two ways in which economies of scale may occur at the industry level, which will normally operate in conjunction. One is through technological indivisibilities in the firms that make up the industry, for instance, the use of robots in car manufacturing.
This happens when there are cost saving technologies that can only be introduced after a certain level of output is reached. In this case, economists talk of economies of scale internal to the firms in the industry.Explore the latest articles, projects, and questions and answers in Competitive Advantage, and find Competitive Advantage experts.
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