If you read the theories of absolute/comparative advantage, you would expect tha
ID: 461372 • Letter: I
Question
If you read the theories of absolute/comparative advantage, you would expect that tropical countries will grow and export bananas while temperate countries will grow and export wheat. Similarly, countries with a highly educated work force will export high-tech goods, while a country with a less educated work force will export garments. If this is true, then countries like Germany and France, both with similar climates, workforces, and resources, should not trade with one another. Yet, this is not the case. What theory of international trade might offer an explanation for this phenomenon. How does it explain this?
Explanation / Answer
It is the nation’s competitive advantage theory given by Porter that supports the trade between countries with similar resources and factors endowments as mentioned in the problem statement.
According to this theory, trade between the nation hardly depends upon the population size, natural resources, location or availability of labor. But, the trade is significantly affected by:
1. Demand conditions in the country
2. Supported and related industry
3. Conditions of the factors of production
4. Rivalry, competition and strategic approach adopted by the firms and industry
All the above four factors give competitive advantage to the nation and they are ranked accordingly as far as global competition is concerned. The difference in the ranking and level of competitive advantage causes countries to trade among themselves. For example, lack of related industry causes companies to import the intermediate goods from the other nations who can export that product. Similarly, pricing as a competitive advantage can help companies from one nation to export the cheaper product to other nations. It builds trade in similar countries.
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