University of Phoenix
Global Business 381
December 20, 2010
Professor Bobbie Murray
Absolute advantage theory addresses when a country has multiple products. “According to theory of absolute advantage, a country has an absolute advantage over the others if it is able to produce more of a product or service with the same number of resources or the same number of a good or service with fewer resources” (Salvatore, 2005, p. 30). This occurs because of the existence of better resources for producing a particular product or service. The concept of absolute advantage can also be applied to other economic entities, such as regions, cities, or firms, but we will focus attention on countries, specifically in relation to their production decisions and international trade flows.
Comparative advantage theory addresses when a country has abundance in trade. “According to theory of comparative advantage, a country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than the others” (Salvatore, 2005, p. 33). In other words, the benefits of a country that is low-producing a good or service would benefit as a country to specialize in producing that good or service and compare with the production of other goods or services.
Hechscher-Ohlin Factor Endowment
The Hechscher-Ohlin factor endowment theory explains the composition of international trade in terms of the relative factor endowments of different countries. “The Heckscher–Ohlin (H–O) theory can be expressed in the form of two theorems: first theory, H–O theorem deals with and predicts the pattern of trade and the second part is the factor–price equalization theorem deals with the effect of international trade on factor prices” (Salvatore, 2005, p. 82)....