International Trade Concepts
With respect to globalization, international trade rates rising every year all over the world. Asia, America, Australia and Middle East countries are trading with eachother, considering that their economic welfare and evaluating their countries’ gains.If a country choose trading some goods and services with eachother, there have to be some advantages. In economics there exist many models, theorems and assumptions about methods of world trade. But when economists evaluate problems or events about world trade, they may prefer to use Adam Smith’s theory which is called absolute advantage theory or they may prefer to use David Richardo’s comparative advantage theory. Both theories are include different assumptions. For evaluating these assumptions, economists try to find the basic causes about international trade.
If a country join international trade adventure, it’s citizens can reach many goods and services which are not producing or serving in their country or they can reach these services with paying lower prices with respect to international trade. But how are they choosing these countries that they are going to import goods and services (or they can export goods and services)? Considering countries’ advantages and interests, with using classical economists’ theories, we can use absolute advantage theory and comparative advantage theory. These two trade theories include one important concept which is called specialization. For instance, U.S. and China not trading with eachother and they use their resources and labours inefficiently.
If they choose one specific trading unit and try to specialize on that good or service, they will have more benefical production and they will use their resources efficiently. Specializing means that one country become expert of some goods and services. Instead of producing other goods and services which are diminishing resources and effecting labours negatively, with international trade and basically with specialization market will become more efficient and both countries will be better off. Specialization has some disadvantages and some advantages. Effecting scale positively, learning quality of production and using resources more efficiently, less change with over costs and there will be exist comparative advantage if we considering advantages of specialization.
But like every concept specialization has disadvantages. Duplication problems are exist with specialization. The fear of dependency lead to duplication and may be under-investment. Also this concept has disadvantages about motivation problems. For instance, specialization causes motivation and coordination problems with respect to countries’ welfare.
First, let’s start determine that what is the absolute advantage and how it works. Adam Smith who is a Scottish social philosopher and a pioneer of political economy, he has determined that if a country has greatest relative efficiency on producing a good or service, that country has absolute advantage on that good or service. Using resources, determining prices of goods and services and getting high profit from a good or from a service is depends on the level of production’s quality and the producer’s ability of specializing on specific goods and services.
In the market, many firms producing same goods and services with different prices. Price differences are exist with respect to high or low level of costs, number of labours and other firms’ production quality ( because of competition).
The ability of specializing, a country can start to produce one specific good or service with using it’s resources efficiently. If there exist two countries, and these countries are using same amout of resources about producing same goods we have to look the results of production, amout of outputs. If inputs amounts are same and outputs are different, producers of more product has absolute advantage. This means that a country has same amount of resources like other country and high amount of product than other country, first country is more productive than others. So specializing in producing one specific good or service provide absolute advantage.