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Discussion Board 3-Absolute Advantage Theory

Jacquelyn Layman
Liberty University
MBA
BUSI604 International Business
Dr. Richard Corum
May 30, 2014



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ABSOLUTE ADVANTAGE THEORY ACADEMIC INTEREST
Satterlee states that a nation is said to have an absolute advantage when it is able to produce
more output than any other nation (2009). Yet others contend that absolute advantage is said
exist when one person, corporation or country can provide a product or service at a cost lower
than if you were to make it yourself. The concept of absolute advantage, as introduced by
economist Adam Smith in the 1700s, is of academic interest to me not only in the context of
international business, but in that of personal achievement as well. As a student, a parent and a
grandparent, I continually seek improved methods and sources of the processes and resources
that will make me a success in any role I consider.

KEY TERM DEFINED
Opposing views
While Adam Smith introduced the concept of absolute advantage, when applied to the
global marketplace, another economist- David Ricardo, saw that it in fact was not a perfect
solution. Ricardo contends that if each nation or person is only to do what they are best at, some
things may not get done, and some people or nations may be left out, as they cannot provide
anything of value to the system of absolute advantage. He expanded on that by adding that if a
nation or person was not only the best at one product or service but also at another, by what
means do they choose the one they shall provide (Nash, n.d.).
This is where the concept of opportunity cost becomes beneficial. Which one of these
products or services would net you the most profit? What will you forfeit by making your
choice? This new train of thought led to the introduction of the theory of comparative
advantage. By this theory, the person or nation should specialize in the product or service that
has the lowest opportunity cost (Nash, n.d.).
Key attributes
Absolute Advantage
No person or country would provide themselves what they can buy elsewhere at a lower
cost.
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Maintains that because resources are different in different areas, some countries will have
absolute advantage to produce goods using these resources, i.e. cheaper, faster, and
better.
Comparative Advantage
Adds that a nation should only produce goods for which their opportunity cost is the
lowest.
Points out that while two countries may have a comparative advantage at the same thing,
only one with have the absolute advantage.

ARTICLE SUMMARY

The article National competitiveness and absolute advantage in a global economy
(2006), from the MPRA, or Munich Personal RePEc Archive by Sergio Parrinello of the
University of Rome, takes issue with the contention that a national economy cannot be
competitive as a whole because according to Ricardos theory a country must possess a
comparative advantage in some sector (Parrinello, 2006). The paper argues that such a basic
claim to the idea of national competitiveness fails to see the bottom line of a national company
competing in the global market (2006). To this the author adds that some trade theorists, such as
Paul Krugman for instance, who criticized the rhetoric of competitiveness while citing
President Clintons statement that each nation is like a big corporation competing in the global
marketplace (1994). Krugman further suggests that countries do not go out of business,
although they may not be happy with their economic performance, and that they [countries]
have no well-defined bottom line, and as such the concept of national competitiveness is
elusive (1994).
To further the main argument, the author maintains that absolute productivity and
absolute advantage may rise above relative productivity and comparative advantage in this
context, citing free capital movement and possible unemployment as key affective components
of all productive sectors of a single country (2006). This argument further offers the theoretical
foundation to the idea that national competitiveness can be a source of economic conflict
among national members of a global economy (2006).
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In addressing meaningless vs. meaningful national competitiveness, the paper asserts that
the theory of international trade has made enough substantial and debatable progress since
Ricardos theory as to expand the dimensions of the commodity space of the trade models,
bringing about generalizations of the classical and neo-classical theorems of trade. New trade
theories, according to the article, have investigated new causes of international specialization
associated with imperfect competition and oligopoly, endogenous comparative advantages, and
strategic trade choices (2006). These dimensional generalizations allege Parrinello; have led to
a weaker meaning of some basic theorems. While these assertions offer some specialization of
all countries, where an international equilibrium with a no trading country may happen, they
are meaningless in a global competitive context, ruling out international movements of capital
and direct investment (2006).
Conversely, in a global economy where commodities are tradable and all forms of capital
are freely mobile, with one or more countries who produce two commodities by given techniques
and using a given labor wage and like commodities as circulation capital, and subject to a
constant returns scale, free competition rules over all markets. Assuming an internationally
mobile capital, a long-period equilibrium is associated with a uniform interest rate across
countries (2006). In this scenario, the equilibrium falters by differences in absolute productivity
and absolute advantages. These differences, since wage, and commodities are same, influential
factors fall back to the given techniques. Given techniques, and wage rates with constant returns,
the rate of interest and terms of trade in the above global economy model are determined fully
without the influence of demand (2006). This theory, that a meaningful bottom line for the
national economy exists in a global economy, contends that a whole capitalistic economy is
not competitive if all of its capital using techniques are unprofitable at the international
equilibrium prices, and thereby overrules the notion that a country must always possess a
comparative advantage in something (2006).
Parrinello points out other factors that influence national competitiveness such as income
distribution, size of the country, technological advancement of the country, self-sufficiency
relative price of the country and other co-determinants (2006). Parrinello suggests that a certain
hierarchy exists in the choice of exogenous distributive variables in a global economy model
where small countries co-exist with large countries, and that the leading countries have their
own institutional characteristics, including wage rates. These countries say Parrinello, determine
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the world prices and the general rate of interest in their choice of production systems, and the
competitive small country must possess at least one industry that can pay a wage at the world
prices and interest rates that is not lower than its admissible wage (2006).
Parrinello closes the theoretic model by suggesting fixing the ratio between the wage
rates which have been thus far fixed exogenously and the rate of interest in the global economy
which has been thus far represented as an endogenous variable as an ad-hoc way of closing the
model.
On the bottom line and degrees of competitiveness, Parrinello contends that the measure
of the distance from the bottom line of national competitiveness can be the increase of the
national wage rate that, ceteris paribus, would lead a country to its ultimate border line of
competitiveness (2006). Finally, the paper asserts that technical progress will lead to an
upward shift of the self-sufficiency wage of the innovative country, and may lead to an upward
shift of the wage frontier of the global economy (2006).
DISCUSSION
The article refers to a model created by Parrinello that expands upon the above explanation
well in the area of opportunity cost and absolute advantage. With detailed interpretations of the
global economy, commodities, wage and interest rates and the results of exogenous and
endogenous variables on the competitiveness of the national economy in the global marketplace.
Specifically, the article relates to the content of this module/week in that the units covered in
our texts by Satterlee are heavily concentrated on theoretical foundations and economic systems.
The absolute advantage theory seems to have a firm influence on the base of these theories
(Satterlee, 2009)
An absolute advantage in international trade for the United States: the military arms
industry (Rarick, Brooke, & Mich, 2012, p. 11-16) expands even further on the influences to
absolute advantage, adding government regulation, political climate. Additionally, the case
study begs to question the legitimacy of exporting war machinery at record levels while with
the same breath preaching global peace. The influence of political issues on global trade is
evident in all markets, but nowhere as evident as in the sale of arms. Additionally, trade
restrictions with certain countries limit the sale of arms for a variety of reasons, and other
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influences such as nonproliferation agreements and influential groups such as Missile
Technology Control Regime limit the trade of arms.
Royall Brandiss offers a differing opinion of absolute advantage in The Myth of Absolute
Advantage, published in volume 57, issue 1 of The American Economics Review. Brandiss
shows that a days labor in Europe is not the same thing as in America in terms of productivity.
By this light, cost production cannot be measured in terms of labor-days, thereby changing the
rationale of pricing the product. If the only factor that gives a country absolute advantage were
price, then by this theory, the theory of absolute advantage would seem illogical (1967).
In his article in the Forum for Social Economics, volume 37, issue 2, titled Revisiting
the Relevance of International Trade Theory?, Lutz revisits the humanistic institutional
economist John Culbertsons view of the global economy, namely his view that economists were
incorrectly underestimating the dark side of competition (2008). To give yet another view of
this opinion, Lutz refers to a self-published book by Culbertson titled Competition: Constructive
and Destructive in which it proclaims that in any activity, there are two ways to be a winner:
Show superior performance within the existing set of rules,
Avoid playing by the rules.
Additionally Culbertson insisted that this behavior caused the market to become intolerant,
claiming, The market would not respect, nor permit pockets of decent behavior in a world of
unfair competition (2008). While this may seem slightly exaggerated, it is part of a series of
what Lutz refers to as the underlying myths of trade theory. Lutz proclaims the four underlying
that have shaped trade theory as:
1. In a global world nations trade with each other
2. Trade between nations will tend to be balanced
3. Comparative advantage governs international trade
4. The productive American worker
With this being said, Lutz moves on to describe Culbertsons alternative trade policy
which demands that except in cases of trade between nations with very similar laws, income
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standards, social standards and regulations, foreign exchange must be arranged as a system of
barter (Lutz, 2008).
Finally, as mentioned in the opening of this discussion, Krugman, in Competitiveness: A
dangerous obsession makes three main points of issue. Concerns about competitiveness, he
stresses, as an empirical matter, are almost completely unfounded. He goes on to try to define
why international competition as the economic problem is unattractive to people. Lastly he
argues that obsession with competitiveness is dangerous as it skews domestic policy and is a
threat to the international economic system. The relation in this to the main point of this article
is the foundation of absolute advantage is none other than competition. Krugman argues that
fear is the main reason that nobody challenges the current economic policy. Krugman states that
while his article may influence people, it may not make him many friends (1994).

REFERENCES
Brandiss, R. (1967). The Myth of Absolute Advantage. The American Economic Review,57(1),
169-175. Retrieved from http://www.jstor.org/stable/1815613
Krugman, P. (1994). Competitiveness: A dangerous obsession. Foreign Affairs, 73(2), 28-44.
Lutz, M. A. (2008). Revisiting the Relevance of International Trade Theory. Forum for Social
Economics, 37(2), 147-164. doi:10.1007/s12143-007-9008-z
Nash, J. (n.d.). Absolute Advantage in Trade: Definition and Examples. Retrieved from
http://education-portal.com/academy/lesson/absolute-advantage-in-trade-definition-and-
examples.html#lesson
Parrinello, S. (2006). National competitiveness and absolute advantage in a global economy.
Working Paper Dipartimento di Economia Pubblica, 95, 1-23. Retrieved from
http://mpra.ub.uni-muenchen.de/30807/
Rarick, C. A., Brooke, R. A., & Mich, C. C. (2012). An absolute advantage in international
trade for the United States: the military arms industry. Allied Academies International
Conference. International Academy for Case Studies. Proceedings, 19(2), 11-16. Retrieved
from http://search.proquest.com/docview/1271920333?accountid=12085