Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Globalization has made the concept of comparative advantage more relevant than ever.
Comparative advantage is defined as one country's ability to produce a good or service more efficiently and inexpensively than another. Economist David Ricardo defined the theory of comparative advantage in his book, On the Principles of Political Economy and Taxation.
Comparative advantage has influenced the way economies work from the time that countries first started trading with each other many centuries ago. Globalization has brought the world together by encouraging more trade among nations, more open financial institutions and a greater flow of investment capital across international borders. In a globalized economy, countries and businesses are connected in more ways than ever before.
Rapid and efficient transportation networks have enabled the cost-effective shipment of goods across the world.
The global integration of financial markets has dramatically lowered barriers to international investment. The near-instantaneous flow of information over the Internet enables companies and businesspeople to share knowledge about products, production processes and pricing in real time.
Together, these developments improve economic output and opportunities for both developed and developing nations. These factors also cause greater specialization based on comparative advantage. Less-developed countries have benefited from globalization by leveraging their comparative advantage in labor costs. Corporations have shifted manufacturing and other labor-intensive operations to these countries to take advantage of lower labor costs.
For this reason, countries such as China have seen exponential growth in their manufacturing sectors in recent decades. Countries with the lowest labor costs have a comparative advantage in basic manufacturing.
Globalization has benefited developing countries by providing jobs and capital investments that would not have otherwise been available. As a result, some developing countries have been able to progress more quickly in terms of job growth, educational attainment, and infrastructure improvements. Advanced economies, such as the United States, Canada, Japan and much of Europe, have benefited from globalization in numerous ways.
It is in the best interest of countries to produce the goods and services in which they have the highest comparative advantage. Article Sources. Investopedia requires writers to use primary sources to support their work.
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Investopedia does not include all offers available in the marketplace. Related Articles. Macroeconomics What is comparative advantage?
Economics What Is International Trade? Business Essentials Absolute vs. Partner Links. Related Terms What Is Trade? A basic economic concept that involves multiple parties participating in the voluntary negotiation. Comparative Advantage Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners.
What Is the Absolute Advantage? Absolute advantage allows an entity to produce a greater quantity of the same good or service with the same constraints than another entity.
David Ricardo David Ricardo was a classical economist best known for his theory on wages and profit, labor theory of value, theory of comparative advantage, and others. What Is the Net Exports Formula?
A nation's net exports are the value of its total exports minus the value of its total imports. The figure also is called the balance of trade. The national competitiveness strategy should have a different orientation at each stage. At the most basic level of economic development, competitive advantage is determined by resources, such as low-cost labour and access to natural resources.
Many developing countries, and most least developed countries, are mired in this stage. The export mix is extremely narrow and typically limited to low value-added products. Dependence on international business intermediaries is high, and margins are low and susceptible to swings in prices and terms of trade. Technology is assimilated through imports, imitation and foreign direct investment FDI. In this stage, strategy-makers should design strategies to attract capital investment and to invest the proceeds of economic growth into the wider determinants of national competitiveness, specifically health, education and infrastructure.
One level up is the investment-driven stage, where countries begin to develop competitive advantage by improving their efficiencies and developing increasingly sophisticated products.
Improvements are made to imported technologies; there is extensive joint venturing and heavy investment in trade-related infrastructure roads, telecommunications and ports. The focus of the national export strategy at this second stage should be on further improving the business environment through revisions in regulatory arrangements customs, taxation and company law.
Strategy should assist prospective exporting firms to extend their capabilities within the international value chain. As production shifts from commodities towards manufacturing, sector-level strategy should seek to support greater value-addition nationally within the value chain.
While promotion of FDI should, of course, continue to be a strategic priority, strategy-makers should focus increasingly on encouraging in-country business alliances see article on pages At the final stage in the competitiveness process, the innovation-driven stage, the country's competitive advantage lies in its ability to innovate and produce products and services at the frontier of global technology. Strategy should focus on technological diffusion and on establishing an increasingly efficient national environment for innovation.
The emphasis should be on supporting institutions and extending incentives that reinforce innovation within the business sector. Companies should be encouraged to compete on the basis of unique strategies.
The development of service export capacities should be a priority objective.
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