Companies usually try not to differentiate themselves from what gave them a considerable amount of profits. The manufacturing industry is pivotal for any development process. One thing’s relevant, a country trading internationally with a strong agriculture sector maybe at a loss, same with a country relying on it’s services industry or the quaternary sectors but with a strong manufacturing sector, a country can win on both the domestic and the international market fronts.
The real problem emerges when the country’s economy, that is largely dependent on the balance of payments to sustain itself, is severely affected when the country exposes itself to free trade. So the question remains:
1. What to produce?
2. How to produce?
3. How much to produce?
These questions have been answered over a century ago. Yet, we try to figure out what’s best over what’s not. I will sum up 3 ideas leading to answer the questions above.
Firstly, there was the theory of absolute advantage that tells us to produce commodities that the other nation can’t produce or can’t produce as cheaply and as efficiently as the domestic country can – and trade the commodity with the nation that can’t produce it.
Secondly, there was the theory of comparative advantage which states that international business should occur depending on the gainful advantage a nation acquires by producing a heterogeneous commodity. Where the advantage of man hours put in are accounted leading to comparative analysis of opportunity costs thus leading to the decision over a myriad of choices.
Lastly, comes the Hechsher-Ohlin’s idea of why international trade occurs because countries use what is at surplus and export while importing the rare finished products or any product that is scarce.
Comparative advantage is the king of theories in a “close to FTA” world. International business is being conducted on the basis of comparative advantage. The perfect examples of this, are all the best of the products, the heavily selling products in the world today. The iPhone or the Dell computer are all the outcomes of such modelling-in assemblies. Industries acquire parts from various parts of the world, intermix, assemble and produce the output. Therefore, if you see a product manufactured in China, know that it’s parts probably aren’t from China.
And is how this information useful to you?
1. Get to know which country produces the largest amount of goods in bare minimum of time.
2. Invest in those companies and watch your money grow.
3. Invest long term because once you zero down to a certain fetching investment based on comparative advantage, your investment takes a long time in case it has to root out certain losses for you as developing resources to the extent of having advantage over other countries – the needed skill development and resource development, takes an incredibly long period to compete efficiently. Here, time is your saviour.
4. Preparing your portfolio is easier once you are able to identify how the Koreans can manufacture a cellphone more efficiently than how Indians can, how Indians manufacture software more efficiently than Koreans can. As countries trade with advantages, identifying advantages is the sole problem an investor can have and which, if done as to theory considering few externalities, the investments are surely going to make your moolah in the market.
©The Idea Bucket, 2013. Submitted by Mikky. For more articles by the author, you can check out The Idea Bucket Book (Volume 1) here(at a discounted price of $2.80).
And you can also check out “EARTHBOUND” @ $1.99 (discounted)
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- Comparative Advantage (cafehayek.com)
- Economists Find Evidence for Famous Hypothesis of Comparative Advantage (economistsview.typepad.com)
- Identifying and Discussing Examples of Comparative Advantage (bkm3g.wordpress.com)
- Why the theory of comparative advantage is overrated (marginalrevolution.com)