Trade theory
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Please compare and contrast the following major trade theories:Absolute advantage, Comparative advantage,Heckscher-Ohlin factor endowment.
Then, select one of the major trade theories and answer the following question:
What cultural, physical, economical, financial, and political impediments might prevent the successful application of your selected trade theory? Be sure to cite your references in your paper.
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Solution Summary
Related to trade theory, this solution addresses the two questions im some detail. References included.
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The theory of absolute advantage is based on the assumption that the nation is absolutely better (i.e., more efficient) at production of certain goods than are its trading partners. Smith showed by his example of absolute advantage that both nations would gain from trade. Adam Smith predicted that under free trade, each nation should specialize in producing those goods that it could produce most efficiently. Some of these goods would be exported to pay for the imports of goods that could be produced more efficiently elsewhere (http://applications-of-strategic-management.24xls.com/en110). This theory does not explain cultural and political treads that impact the supply chain where nations are not specializing in certain goods, and as globalization increases companies setting up business in other countries, like the providing the financial costs to set up manufacturing in developing countries.
In comparison, Ricardo's theory of comparative advantage states that even if a country has the ability of a person or a country to produce a particular good at a lower opportunity cost than another person or country, trade still benefits both countries, based on comparative costs. His writings demonstrated what has become known as:
"... the principle of comparative advantage: a nation, like a person, gains from the trade by exporting the goods or services in which it has its greatest comparative ...
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