group assignment which theory is dominant in explaining international trade today and why

As countries specialize in their production, the division of labor is optimized and more economic value is created.Mechanical cost and relative comparative advantage: Comparative advanta

FPT UNIVERSITY- CAMPUS CAN THO

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GROUP ASSIGNMENT

ECO201 Lecturer: Ms Truong Thi Huyen Trang Class: IB1706

Group 1

Nguyễn Trọng Khang

Nguyễn Anh Thư

Nguyễn Minh Nhật

Nguyễn Thị Tiểu Yến

Nguyễn Thị Mỹ Ngân

Dương Quốc Em

TABLE OF CONTENT

1 DAVID RICARDO'S THEORY OF COMPARATIVE ADVANTAGE: 3

a Circumstances of birth: 3

b Concept: 3

c Characteristic: 3

d Advantages and disadvantages of the theory of comparative advantage: 4

2 H_O THEORY: 6

a Circumstances of birth: 6

b Concept: 6

c Characteristic: 7

d Advantages and disadvantages: 8

3 WHICH THEORY IS DOMINANT IN EXPLAINING INTERNATIONAL TRADE TODAY, AND WHY? 9

4 REFERENCES: 11

1 DAVID RICARDO's Theory of Comparative Advantage:

a Circumstances of birth:

According to Adam Smith's earlier theory of absolute advantage, in

international trade each country will find for itself some products in which it has absolute advantage, i.e it will benefit from specialization and what products it produces most efficiently and trades with other countries So are countries that do not have an absolute advantage in any product that cannot benefit from international trade? In 1817, Ricardo published The Principles of Political Economy and Taxation, in which he mentioned comparative advantage With his theory of comparative advantage, he made an important contribution to the understanding of the division of labor and the exchange of goods between countries

b Concept:

This concept refers to the ability of one product to be produced at a lower cost than to produce other products

- Comparative advantage comes from relative production efficiency

- Comparative advantage can be achieved in each country in international relations if a country concentrates on the production and export of goods with less disadvantage and imports the goods it has more disadvantages

c Characteristic:

Specialization and division of labor: Comparative advantage encourages

countries to focus on producing the goods in which they have a comparative advantage According to Ricardo, each country should focus on producing those goods it is able to produce more efficiently than the other As countries specialize in their production, the division of labor is optimized and more economic value is created

Mechanical cost and relative comparative advantage: Comparative advantage

is based on the concept of mechanical cost (opportunity cost) Mechanical cost

is the amount of a good that a country must sacrifice to produce one more unit

of another good If a country has a lower mechanical cost than another in producing a good, it has a comparative advantage in producing that good The relative comparative advantage between countries allows them to share jobs and utilize specialization to produce more goods with the same amount of labor

Benefits of Trade: Comparative advantage encourages the exchange of goods

and services between countries According to Ricardo, countries will export goods in which they have a comparative advantage and import goods in which they are inefficient This enhances the utilization of economic benefits and common development By focusing on the production of goods in which they have a comparative advantage, countries can save costs, improve efficiency, and expand market reach

Multilateral and concentration advantages: Comparative advantage according

to Ricardo shows that both countries can benefit from trade, even if one country has a comparative advantage in more goods than the other other family Through exchange, countries can take advantage of the economic benefits of specialization in production They can create goods of higher value when they cooperate with each other, increasing the division of labor and enhancing common development

Flexibility and adaptability: Comparative advantage is not fixed and can

change over time Countries can develop new comparative advantages through improving technology, improving productivity and innovation As economic conditions change, countries can adapt and change the scope of production to take advantage of the new

d Advantages and disadvantages of the theory of comparative advantage:

* Advantage:

Comparative advantage in economics is an important component of

international trade It provides a way to develop better relations with other countries In addition, the country has the opportunity to trade its best products profitably As a result, profit margins also increase Furthermore, since these products reach foreign markets, the number of potential customers has increased In addition, it brings many other benefits such as absolute advantage, competitive advantage, etc

Lower opportunity costs and higher profit margins: Countries or companies

with a comparative advantage can concentrate labor, capital, and resources on

production that requires a lower opportunity cost and thus a lower opportunity cost achieve higher profit margins

Diversification of products and services: Companies can diversify their

products and services, which can reduce dependence on one market or product and help reduce the risk of a recession economic

Improve product and service quality: Businesses can access new technologies,

ideas and best practices from other countries, which can improve the quality of products and services their own, making them more competitive

Reaching New Markets: Organizations can reach new markets, which can help

increase their customer base and sales

Boosting international trade growth: Corporations can stimulate economic growth by creating jobs, fostering innovation, and increasing the exchange of goods and services between countries

Competitive and Absolute Advantage: Firms that engage in trade do so to take advantage, possibly gaining a competitive advantage or an absolute advantage

* Defect:

Cultural differences: Companies may face cultural differences that can create

challenges, such as communication, negotiation, and business practices While experiencing cultural differences can create challenges, it can also create learning opportunities to understand how different countries operate in business and use your new knowledge to apply that knowledge to your role

Greater costs: While the cost of materials and labor abroad may be cheaper

than manufacturing them in the same country, the savings may not be enough

to offset the costs of shipping and In some cases, shipping costs may outweigh any comparative advantage To ease this challenge, you can create different financial budgets and calculate them to determine if the savings outweigh the additional costs

Difficulty in scale: If products and services require specialized labor and skills,

it can be difficult to increase the size or output of the organization, because it is difficult to find employees with that specialized skill This can create opportunities to strengthen networking to find talented and long-term employees

Exchange rate fluctuations: Companies may experience exchange rate

fluctuations, which can affect the profitability of their operations and investments To avoid this, consider investing in countries with stable

currencies or hedging investments, which help offset financial risk with other countries

However, this theory can only succeed sometimes While countries claim that they are saving costs, the actual costs are greater than expected In addition, if countries try to stop producing inefficient goods domestically, the possibility of unemployment increases

2 H_O theory:

a Circumstances of birth:

H_O Theory, also known as "Competing Regression and Value Creation", is an economic theory developed by two American economists, Prof Collis and Prof Montgomery, published in 1995 H_O Theory provides a new approach to studying and understanding how businesses gain competitive advantage and create value in a competitive business environment

The origin of H_O Theory stems from the need to learn the difference between successful and unsuccessful businesses in creating value and gaining competitive advantage Before H_O Theory was published, earlier economic theories, such as "Stockholder Theory" and "Stakeholder Theory", attempted to explain the problem However, these theories still struggle to explain the differences between firms

b Concept:

The Heckscher-Ohlin (H-O) theory considers the availability of factors of production, including land, labor, and capital, to explain their price differences

It assumes that each country will have a comparative advantage in specializing

in the production and exporting of goods that use many beneficial factors, while importing goods that use many scarce factors and are of high value more expensive

The H-O theory holds that countries with a capital advantage should specialize

in the production of capital-intensive goods, countries with cheap labor should specialize in labor-intensive goods, and countries with rich land and resources should specialize in resource-intensive items

To evaluate the comparative advantage for a product, the H-O theory uses two criteria The first is to assess how cheap the factors of production are in a country The second is the Revealed Comparative Advantage (RCA)

coefficient, which is calculated as the ratio between a country's exports in a particular industry and its total exports

The H-O theory has provided a useful theoretical framework for understanding the division of labor and international trade patterns, based on differences in the availability and use of factors of production between countries It helps explain why countries tend to specialize in production and engage in

international trade based on their comparative advantage

c Characteristic:

* The Heckscher-Ohlin (H-O) theory is built on several important

assumptions:

The world consists of two countries and produces two identical goods: H-O

assumes that the world is divided into two countries and that each country produces two identical goods This helps to focus on factor availability differences between the two countries

Factor availability varies from country to country: The H-O assumes that the

availability of factors of production, including land, labor, and capital, varies from country to country This creates a difference in prices and the use of factors of production in the production of goods

Similar production technology: H-O assumes that the production technology

between the two countries is the same This ensures that differences in the availability of factors of production are the main cause behind comparative advantage

Different goods have different factors of production: H-O assumes that

different goods will have different factors of production For example, a fabric item has a higher labor content than a steel item with a higher capital content H-O assumes that there is no permutation in factor content between items

Perfect Competition in Markets: H-O holds that perfect competition exists in

both markets for goods and markets for factors of production This means that prices are determined by supply and demand, and in the long run, the price of a good is exactly equal to the cost of production

Relatively similar size of two countries: H-O assumes that two countries are

roughly the same size, neither country is considered a smaller country

Factor of production does not move between countries: H-O assumes that

factors of production can move freely within each country, but cannot move between countries

Similar preferences: H-O assumes that consumption preferences are the same

between two countries if they have the same income and commodity prices This means that they tend to consume the same amount of goods

Free Trade and Zero Shipping Costs: H-O assumes that trade between two

countries is free and shipping costs are negligible

* Theory of H-O is proven in practice through specific examples:

For example, the United States has long been a major exporter of agricultural products in the world This partly reflects the richness of America's arable land China excels in exports of manufactured goods in labor-intensive industries such as textiles and footwear This reflects China's relative abundance of cheap labor Meanwhile, the US does not have a lot of cheap labor, so it has long become a big importer of these items

These examples demonstrate the application of H-O theory in explaining international distribution and production specialization based on comparative advantage in the availability and use of factors of production between countries

d Advantages and disadvantages:

* Advantage:

Holistic approach: H_O Theory provides a holistic approach to the study and understanding of how businesses create value and gain competitive advantage

It considers both internal and external factors of the business, including stakeholders and the business environment

Creating value for stakeholders: H_O Theory emphasizes the role of creating value for stakeholders such as customers, suppliers, employees and the community This helps businesses build long-term relationships and create a sustainable competitive advantage

Adaptability and value creation: H_O Theory is well aware that businesses need to adapt to the changing business environment and create new value to maintain and expand competitive advantages It encourages creativity and innovation in the business

* Defect:

Dependent on data and analysis: H_O Theory requires detailed data and analysis to apply regression and analytical methods This can be resource and

time consuming to collect and process data, especially for large and complex enterprises

Complexity and difficulty in application: H_O Theory has a complex structure and requires in-depth knowledge of economics and corporate strategy for effective application This can make theory difficult to understand and apply in practice

Lack of broader social and environmental aspects: While H_O Theory emphasizes value creation for stakeholders, it may lack broader social and environmental aspects Factors such as corporate social responsibility and environmental protection may not be fully covered in this theory

3 Which theory is dominant in explaining international trade today, and why?

In explaining international trade today, the H-O theory proves to be superior to the theory of comparative advantage The H-O theory focuses on resource differences between countries, explaining why a country exports or imports a particular good This is a view that is more relevant in today's world, where the global division of labor and resources has become more complex and countries tend to specialize in production to their competitive advantage me

The theory of comparative advantage explains the impact of many different factors on the division of production between countries, including labor costs and technological power According to this theory, countries will focus on producing goods in which they have a comparative advantage and import goods in which they have no comparative advantage in order to maximize their economic benefits The factor of labor cost promotes the division of production between countries, while the technological force also plays an important role in the transfer of technology from developed countries to developing countries

By understanding and applying the theory of comparative advantage, countries can enhance their trade and economic growth

The H-O theory proves to be superior to the theory of comparative advantage

in explaining international trade today:

+ Technological shift: In fact, technological shift has made resource

differences between countries no longer the sole determinant of comparative advantage Technology has made it possible to produce and access resources more flexibly Therefore, the resource advantage under the H-O theory is more reliable in explaining international trade

+ The evolution of the global supply chain: In practice, countries are not only involved in the production of a single commodity, but often participate in different stages of the supply chain The H-O theory allows for analysis of job

shifts and resource allocation in global supply chains, helping to explain why a country might export goods for which it has no direct comparative advantage + More comprehensive: H-O theory takes the idea of resource differences as a basis and offers a more comprehensive view of international trade It explains more clearly why a country might aim to export goods related to the resources

it has a lot of and import goods related to the resources it has a shortage of The H-O theory is also quite flexible and can be applied to many different situations

The theory of comparative advantage not only explains the division of production between countries, but also explains why countries can enhance trade and information economy growth through concentrated production of goods goods with comparative advantage Countries can optimize their production by focusing on the production of those goods in which they have a comparative advantage over other countries By centralizing the production of these goods, countries can produce them at a lower cost and with higher quality At the same time, countries can also import goods in which they have

no comparative advantage, thereby increasing the diversification of production and providing high-quality products to domestic and foreign markets Since then, international trade has been enhanced and the economies of countries linked together have grown and developed

However, it should be noted that the H-O theory also has its drawbacks and cannot fully explain the reality of international trade Other factors such as trade policy, investment and innovation capabilities, and cultural and political factors also play an important role in determining each country's trade pattern Therefore, the use of H-O theory needs to be combined with other factors to get

a comprehensive view of current international trade

* Conclusion:

The theory of comparative advantage and the Heckscher-Ohlin (H-O) theory are two prominent economic theories that aim to explain international trade While the theory of comparative advantage dates back to the 19th century, the H-O theory was developed in the early 20th century Although both theories have their strengths and weaknesses, they differ in their assumptions, predict and explain international trade patterns The theory of comparative advantage assumes that trade takes place between two countries that produce only two goods, when in reality, countries produce and trade many different goods The H-O theory also assumes perfect competition, which is unrealistic because firms often have market power