Abstract
The paper seeks to highlight on the relevance of the absolute advantage theory on the global market as compared to other theories of international trade. It also describes how the theory is applied using Japan and the United States of America as typical examples of countries that have gained from absolute advantage in relation to their respective major production areas. Moreover, complications and limitations of the theory have also been discussed.
Absolute Advantage Theory
The absolute advantage theory is one of the theories of international trade that make up the most influential potential body of economics. Others include mercantilism, and the theory of comparative advantage (Peng, 2008).
One country has an absolute advantage over another when its production of goods and services consumes comparatively fewer resources. A country is able to produce more output using the same volume of inputs. This theory is also applicable to various economic entities such as firms, regions and cities but a specific focus on countries is good enough to describe what the theory is all about. This is in line with the countries’ international trade flows and production decisions. Equating cost advantages with absolute advantages is a fallacy that presents a scenario of continued confusion (Marrewijk, 2008). The fact that the volume allocation of real resources might vary across different countries is what results into the significant deviation between the two.
The 17th century witnessed a reaction to the mercantilist theory that campaigned for a comprehensive regulation of trade for the purpose of enhancing wealth and growth. In effect, a free trade doctrine emerged by the end of the 18th century. The doctrine was further realized after Adam Smith’s publication of ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ (Marrewijk, 2008). Smith through his work was able to develop a new view point as regards political economy. Regulations work to favor one industry by siphoning away resources from a different industry.
The opportunity cost principle applies to individuals when for instance, a tailor buys shoes from the shoemaker because it is not his or her line of specialization meaning that it would take him quite some time to make a pair (Marrewijk, 2008). It, therefore, explains that an individual finds it wise to concentrate with his/her line of specialization in order to realize competitive advantage. Peng (2008) reveals that other relevant principles include the specialization and opportunity costs principles. A country is able to concentrate in the efficient production of goods when it imports goods from other countries that have comparatively more efficient production. The technological differences between the exporting country and the importing country are what enhance international trade flows.
The absolute advantage principle can be clearly illustrated by comparing USA and Japan. The US produces food while Japan produces cars. In this case, labor is the only input. This means that workers in both countries are equally productive. It is common knowledge that the technology of production is different in Japan as compared to the United States. In essence, Japan …