International Business: Comparative Advantage

The cause of international trade and all forms of business lies in the concept of comparative advantage. This theory dates to the C17th British economist David Ricardo and has been developed to a considerable extent subsequently.
At the heart of this concept is the indisputable contention that different parts of the world are, of course, different from each other. This is evident from the distribution of oil and other precious resources: some countries have oil located within their territories and others do not. Since all modern nations demand oil, then there will need to be some economic transaction (in the absence of military actions) to transfer the oil from where it is supplied to where it is required.


In other words, some countries have a comparative advantage in producing oil over others. Even when the same product could be produced by two different countries, there are certain factors which make production easier in one place rather than another. For example, wheat grows much better in Ukraine than it does in Spain where, by contrast, it is much more practical to produce olives. Assuming Spanish people want wheat and Ukrainians want olives, then an international trade will take place to exchange one for another at a rate determined by relative supply and demand factors.

It is not just resources or agricultural products that can be used in international trade, of course. In reality, just about anyone or anything can be traded in one way or another. Laws are usually required to prevent people from trading in slaves (as well as measures promoting education and social solidarity to prevent people wanting to own slaves) but people can sell their labour. In poor countries, labour may be just about the only thing that can be sold. In the early 1950s, for example, South Korea was one of the very poorest countries in the world and its principal export was human hair sold by women for wigs for the international market. These days, Korean companies can sell sophisticated manufactured goods and intellectual property in the form of pop music and soap operas all around East Asia and beyond.

In the modern world, governments have the responsibility not just to help their corporations sell their products overseas (which earns foreign currency which is always considered to be a good thing) but also to encourage the production of new goods and services which are more valuable and which make better use of the inputs that the country has to offer. If the country has a large number of lowly paid workers, then the government will find ways to encourage investors to set up factories there and to give the workers just enough education to let them function productively in a factory situation. In more advanced economies, the role of the government remains the same but the means of achieving the goals is more complex.
Bizcovering