- •Marketing illustration botswana: the world’s fastest-growing economy
- •9.2 Percent. South Korea is the second fastest per- former, growing at 7.3 percent. China came in third at 6.7 percent.
- •Basis for international trade
- •Production possibility curve
- •Principle of absolute advantage
- •Units of computer
- •Advantage
- •Exchange ratios, trade, and gain
- •Units of computer
- •Factor endowment theory
- •Instead of enhance the country’s competitive advantage.7
- •The competitive advantage of nations
- •Limitations and suggested refinements
- •It’s the law 2.1 money laundering
- •Marketing strategy 2.1 how to move money
- •Marketing ethics 2.1 human trafficking: the worst kind of factor mobility
- •Economic cooperation
- •2.6, Some countries are members of multiple groups.
- •In a free trade area, the countries involved eliminate duties among themselves, while maintaining sepa- rately their own tariffs against outsiders. Free trade
- •Botswana Lesotho South Africa
- •Exhibit 2.1 regional groupings and their nations
- •Venezuela.
- •In 1993, the eu and the efta formed the world’s largest and most lucrative common market
- •Cultural dimension 2.1 the euro
- •Economic and marketing implications
- •2.7 Shows how the United Kingdom can serve as a strategic location for this purpose.
- •Initially, new trade policies generally tend to favor local business firms. For example, ibm encountered problems in Europe, where the eu
- •Questions
- •Discussion assignments and minicases
Advantage
One problem with the principle of absolute advan- tage is that it fails to explain whether trade will take place if one nation has absolute advantage for all products under consideration. Case 2 of Table 2.1 shows this situation. Note that the only difference between Case 1 and Case 2 is that the USA in Case
2 is capable of making thirty automobiles instead of the ten in Case 1. In the second instance, the USA has absolute advantage for both products, resulting in absolute disadvantage for Japan for both. The efficiency of the USA enables it to produce more of both products at lower cost.
At first glance, it may appear that the USA has nothing to gain from trading with Japan. But nine- teenth-century British economist David Ricardo, perhaps the first economist to fully appreciate rela- tive costs as a basis for trade, argues that absolute production costs are irrelevant.2 More meaningful are relative production costs, which determine what trade should take place and what items to export or import. According to Ricardo’s principle of relative (or comparative) advantage, one country may be better than another country in producing many products but should produce only what it pro- duces best. Essentially, it should concentrate on either a product with the greatest comparative advantage or a product with the least comparative disadvantage. Conversely, it should import either a product for which it has the greatest compara- tive disadvantage or one for which it has the least comparative advantage.
Case 2 shows how the relative advantage varies from product to product. The extent of relative advantage may be found by determining the ratio of
computers to automobiles. The advantage ratio for computers is 2:1 (i.e., 20:10) in favor of the USA. Also in favor of the USA, but to a lesser extent, is the ratio for automobiles, 1.5:1 (i.e., 30:20). These two ratios indicate that the USA possesses a 100 percent advantage over Japan for computers but only a 50 percent advantage for automobiles. Consequently, the USA has a greater relative advan- tage for the computer product. Therefore, the USA should specialize in producing the computer product. For Japan, having the least comparative disadvantage in automobiles indicates that it should make and export automobiles to the USA.
Consider again the analogy of the doctor and the mechanic. The doctor may take up automobile repair as a hobby. It is even possible, though not probable, that the doctor may eventually be able to repair an automobile faster and better than the mechanic. In such an instance, the doctor would have an absolute advantage in both the practice of medicine and automobile repair, whereas the mechanic would have an absolute disadvantage for both activities. Yet this situation would not mean that the doctor would be better off repairing auto- mobiles as well as performing surgery, because of the relative advantages involved.When compared to the mechanic, the doctor may be far superior in surgery but only slightly better in automobile repair. If the doctor’s greatest advantage is in surgery, then the doctor should concentrate on that specialty. And when the doctor has automobile problems, the mechanic should make the repairs because the doctor has only a slight relative advan- tage in that skill. By leaving repairs to the mechanic, the doctor is using time more productively while maximizing income.
It should be pointed out that comparative advantage is not a static concept. John Maynard Keynes, an influential English economist, opposed India’s industrialization efforts in 1911 based on his assumption of India’s static comparative advantage in agriculture. However, as far back as 1791, Alexander Hamilton had already endorsed the doctrine of dynamic comparative advantage as a basis of international trade.3 This doctrine explains why
Taiwan and India’s Bangalore have now become high- technology centers that have attracted investments from the world’s top technology companies. It also explains why or how the United Kingdom, forging more steel than the rest of the world combined in
1870, lost the lead to the USA. Andrew Carnegie’s mills among others were able to produce twice as much steel as Great Britain three decades later.4