05 Feb Comparative Advantage Essential for Economic Success in International Trade
Comparative advantage in trade terms means that one company can produce the same product or service at a lower cost than the other. International Trade can be more successful when companies realize they need to produce more goods than their rivals with an equal amount of resources. Operating at maximum efficiency gives businesses an advantage when negotiating international trade. The opportunity cost of a resource is the value of the next best 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.
An example of comparative advantage is the increase in international customer service call centers. To save money, many companies based in the United States now have customer service call centers in places like India and the Philippines because it is cheaper than having a call center in America. This gives countries like India and the Philippines a comparative advantage in the call center business. Comparative advantage has become the fundamentally accepted theory of trade for obvious reasons. Knowing what other countries need in advance gives you an advantage because you can plan ahead. Since you know that what you have is considered of value to other countries, trade negotiations are easier and you have future buying power. Comparative advantage can be what separates your company from one that settles for the status quo.