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The Principle of Absolute and Comparative Advantage in Economic

Globalization has significantly affected the world trade and left many economies struggling to find the spheres where they could be profitable. When countries decide to produce certain products and choose the industry that is worth investing in, they employ the theory of economics, namely the concepts of absolute and comparative advantage (Theories of Trade, 2011). The former constitutes an economy’s ability to produce a good in the most efficient way, compared to other economies (International Trade & Globalization, 2010). In turn, the latter refers to a country’s ability to produce a good most efficiently compared to other goods it produces (International Trade & Globalization, 2010). This allows nations to adjust their production capabilities to fit their advantageous positions and be competitive globally.

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The absolute advantage gives a nation an opportunity to offer products that have the best quality to price ratio. For example, Chinese “footwear exports have reached about 65% the world’s total shoe exports, and thus China has become the world’s largest producer and exporter” (Zhang, 2018, p. 192). This demonstrates that China has an advantage over the rest of the world in the sphere of shoemaking since, for other countries, it is more beneficial and economically reasonable to buy products from China. Of course, some countries can impose an embargo on the countries with the absolute advantage, but it will lead to higher prices and worse product quality for the consumers.

The comparative advantage is calculated through the comparison of the production of one good to other goods made by the country. For example, Vietnam is not the largest producer of rice in the world, thus it does not have an absolute production. Yet, its geographical location and natural conditions make growing any crop other than rice virtually impossible, and in 2014, the nation had only a 6.9% share of the world’s total (Chauhan et al., 2017). Therefore, the rice industry in Vietnam has a comparative advantage in relation to other crops that could be possible to grow in the country.

References

Chauhan, B. S., Jabran, K., & Mahajan, G. (Eds.). (2017). Rice production worldwide. Springer. Web.

International Trade & Globalization. (2010). International business (5th ed.). Pearson Education.

Theories of Trade. (2011). International trade: Absolute and comparative advantage [Video file]. Web.

Zhang, C. (2018). An empirical analysis on export status quo and international competitiveness of Chinese footwear products. Leather and Footwear Journal 18(3), 187-194. Web.

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StudyCorgi. (2022, February 9). The Principle of Absolute and Comparative Advantage in Economic. Retrieved from https://studycorgi.com/the-principle-of-absolute-and-comparative-advantage-in-economic/

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StudyCorgi. "The Principle of Absolute and Comparative Advantage in Economic." February 9, 2022. https://studycorgi.com/the-principle-of-absolute-and-comparative-advantage-in-economic/.

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StudyCorgi. 2022. "The Principle of Absolute and Comparative Advantage in Economic." February 9, 2022. https://studycorgi.com/the-principle-of-absolute-and-comparative-advantage-in-economic/.

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StudyCorgi. (2022) 'The Principle of Absolute and Comparative Advantage in Economic'. 9 February.

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