Question

Discuss the impact of the theory of Comparative Advantage on U.S. Marketing. Please give examples and elaborate on them

Answer 1

Theory of Comparative advantage

Comparative advantage is a term which we associate with the economist named DAVID RICARDO. According to him a country only needs to have Comparative Advantage. This theory was published by him in 1817 in his book titled, “On the Principles of Political Economy and Taxation.” A country is having an comparative Advantage when it produces goods at a lower opportunity cost, but does not compulsorily has an absolute advantage in it. He believed that the international trade is governed by the comparative cost advantage and not by the absolute cost advantage. A country specializes in that line of production in which it has a substantial relative or comparative advantage in costs when compared to other countries. The country will depend upon imports for the commodities in which there is less comparative advantage or a relative cost disadvantage.

EXAMPLES

1. America has a comparative advantage in its vast land mass which is bordered by two oceans. Due to the availability of cheap natural resources as fresh water, arable land, and available oil businesses in U.S. benefit and also are protected from any potential land invasion.

• Large Land Mass-The geography and geology of the United States provides a substantial comparative advantage in building its economy. large landmass America's under one nation allows economies of scale in government and businesses. Hence, lowering the cost of providing services & products

• Coastline-Long American coastline contributes $222.7 billion to GDP and also created 2.6 million jobs in 2009 with approx. three-quarters of them related to ocean recreation & tourism. Highest paying of which is oil drilling, where workers earn an average of $125,700 each. The other industries provided by the ocean are ship and boat building, transportation and shoreline construction.America is fortunate to have a large coastline. Landlocked countries have little access to the sea and hence leading to expensive imports and exports.

• People-America with the high number of immigrants carrying with them courage and flexibility to survive in the new environment helped in the creation of innovative culture, especially considering the technological aspect.This made Silicon Valley the leading tech center of the world.

• Water-80% water used in America is provided by rivers, lakes and streams. Agricultural irrigation uses 31%. According to the estimates United States Geological Survey only 20% is pumped out of the ground for irrigating the semi-arid Great Plains.

• Oil, Coal, and Gas-The abundance in the presence of coal and now the efficient technology has enabled it to export large amount of oil giving it an edge over the other countries.

2.Example of the India's call centers-Companies in U.S. buy this service of call centers in India because of it’s cheaper availability than it would have been in U.S. Indian call centers aren't better than U.S. call centers. Their workers are not so fluent in English. But the cheaper availability of the service makes the trade off worth it. Indians’ labor costs are among the lowest wages in the world. This yields a comparative advantage in IT jobs in India. American firms are able to decrease their costs to half of before by outsourcing such jobs to India.

CONCLUSION

Previously, comparative advantages used to occur more in goods and less in services. That was because of the easy export of goods. But now due to the presence of internet even services are easier to export. E.g.-call centers , banking & entertainment. Most important role is played by its diverse population belonging to different cultures which brought with them fresh ideas and innovation to business. These advantages have further pushed America in becoming a major global economic power.