04 Jun Absolute and Comparative Advantage Essential for Economic Success in International Trade
Adam Smith understood commerce and trade when he wrote about absolute advantage in his book, “The Wealth of Nations”. He knew the importance of being able to produce more goods than his competitors while using the same amount of resources. This not only means that a company is operating at top efficiency but that they are also ahead of their competition when negotiating international trade. Being able to produce more with fewer means increased profits, which works in favor of everyone involved. In addition, having a comparative advantage in trade terms means that a company can produce more product or service at a lower opportunity cost than another. The opportunity cost of a resource means the value of the next highest valued alternative use of that resource. This factors into comparative advantage in business and trade because knowing the opportunity cost of a company’s goods or services helps them understand what must be given up in order to gain more in return.
Comparative advantage has become the fundamental and accepted theory of trade for obvious reasons. If you understand that what you have is considered of value to other companies, it will be easier to negotiate trade with that company. This gives an organization buying power and helps to establish the future of the business. This theory helps corporations turn quick profits and solidifies alliances with trade partners worldwide. If a company can supply you with a product you need cheaper than the cost of making it yourself, common sense tells you to buy it from them. Another advantage is the possibility that they make the product better. A continuous cycle of the comparative advantage principle can result in huge profits and ensure a companies future trade success. That is why absolute and comparative advantage have become the fundamental and accepted theories of trade.