Main Theories of International Trade and Corporate Strategy Essay

Main Theories of International Trade and Corporate Strategy - Essay Example The theory of absolute advantage states that a country contains an unconditional advantage in the production of a product when it can produce more of that product with the same amount of resources than another country. (Aghazadeh, 2003) Absolute advantage can also result in higher incomes for a country as one hour of labor output should increase and the country should become more efficient as a result of trade between countries (Herriot and Pemberton, 2006, 34). Realistically, one country should have an absolute advantage over another country in the production of some goods. As an example, Saudi Arabia would have an absolute advantage in the production of oil compared to a country such as Japan. (Beardwell, Holden & Claydon, 2004, 14) The theory of comparative advantage states that a country has a comparative advantage in producing a product when its opportunity costs are lower than another country producing the same product. Opportunity costs are sacrificed in order to consume or produce another good. With comparative advantage, countries can benefit by specializing in trading certain products. Production or total output should boost when countries concentrate on producing and exporting goods and sequentially lead to a further proficient application of resources (Herriot and Pemberton, 2006, 34). The Heckscher-Ohlin factor endowment theory is mainly about the variation in the comparative profusion of factors of manufacture in a variety of states as the most significant indication of the dissimilarity between relative costs of services and proportional benefit (Herriot and Pemberton, 2006, 34). Every country has various amounts and types of resources that will determine what they are able to produce or not produce. The combination of resources such as land, labor, and capital is referred to as a country's factor endowment.