Page 36 - International Marketing

NPP

38 International Marketing BRILLIANT'S

States makes only 10 cars for every 20 units manufactured in Japan. In
this instance, Japan has an absolute advantage.
Table : Possible Physical Output
Product United States Japan
Computer 20 10
Automobile 10 20
In this instance, it should be apparent why trade should take place
between the two countries. The U.S. has an absolute advantage for
computers but an absolute disadvantage for automobiles. For Japan the
absolute advantage exists for automobiles and an absolute disadvantage
for computers. If each country specializes in the product for which it has
an absolute advantage, each can use its resources more efficiently while
improving consumer welfare at the same time. Since, the United States
would use less resources in making computers, it should produce this
product for its own consumption as well as, for exports to Japan. Based
on this rationale, the U.S. should import automobiles from Japan rather
than manufacture them itself. For Japan, of course, automobiles would be
exported and computers imported.
2. The Theory of Comparative Advantage
This theory demonstrates that a country can gain from trade even if it
has an absolute disadvantage in the production of all goods or that it can
gain from trade even if, it has an absolute advantage in the production of all
goods. In other words, a country tends to specialize in production of
commodities for which it has got comparative cost advantage or where its
cost of production is lower than in other countries. This can be classified by
taking a famous example by Ricardo in the analysis of comparative cost.
Suppose, there are two countries -England & Portugal- each producing
cloth and wine respectively. The amount of labour required to produce one
unit of these items is:
Country Cloth Wine
England 100 120
Portugal 90 80

It is clear from the above figures that, Portugal can produce both cloth
and wine at lower cost because the amount of labour required per unit of
output is lower. But, if the relative difference in costs between Portugal
and England is compared, it is found that Portugal is more efficient in