December 22, 2008
International trade and investment
The three major trade theories are absolute advantage, comparative advantage, and the Hecksher-Ohlin theory. All of the theories are used in international trade and are a basis for which international trade is measured.
To begin with it is necessary to be informed about each of the three major trade theories. According to Wikipedia, “absolute advantage may refer to the ability of a particular person or a country to produce goods with less resources than another person or country.”(wikipedia). Meaning the country with an absolute advantage will make more money. For example when yo9u were a child and had lemonade stand with the neighbor you were friends with you two probably split the profit at the end of the day. However, this is something that could have been performed on your own and you could have kept all the money. The country with this ability does not have to pay as many laborers to make the product and therefore is able to retain more of the earnings from the product itself. Absolute advantaged can be contrasted to Comparative advantage.
Comparative advantage according to wikipedia “ refers to the ability of a person or a country to produce a particular good at a lower opportunity cost than another person or country” (wikipedia).
Comparative advantage shows how trade can create value for both countries or people even when one can produce all the goods with fewer resources than the other. These benefits are actually called gains from trade.
While absolute advantage states that one person makes on product in one country and in another two people are working on one product in one country and in another two people ar4e working on one product pooling together both of the people’s knowledge as in comparative advantage it is possible that while it is taking two people to work on this product the product turn out may be faster and therefore more profitable.