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.


 

Absolute advantage and balance of trade are two important aspects of international trade that affect 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
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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