O'Sullivan and Sheffin Pointed Out (2003), an Term Paper

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O'Sullivan and Sheffin pointed out (2003), an absolute advantage, in commercial terms, describes the advantage that a country has over another country when it comes to manufacturing a product or service, at the same level of resources. Since the level of resources is the same, the element that usual differentiates between the output is the labor productivity, which varies from country to country because of different reasons, including better organization, level of education, specialization etc.

Comparative advantage, on the other hand, places the issue in the realm of competitive costs and accepts the idea that, although a particular country may have no absolute advantage, it would still have a comparative advantage over another country when it came to a particular good or service: it would be able to produce a particular good or service more efficiently than another.

Absolute and comparative advantages are useful when discussing trade theories, particularly because the comparative advantage theory does a better job of explaining why trade relations come about and what motivates countries to involve themselves in bilateral exchanges. The absolute advantage theory is somewhat limitative, because a country that has an absolute advantage has no motivation to trade with another country.

The Heckscher-Ohlin model is perhaps the best fitted to explain the current global trends.

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The model proposes the idea that countries will generally export products that they are able to produce at low input costs, profitably using the existing factors of production, including land, labor and capital. At the same time, the country imports products that are manufactured using production factors that the country does not have in abundance (Blaug, 1992).

The Hecksher-Ohlin model actually builds on the comparative model, only that it expands the notions presented their, where the labor efficiency was the primary criterion of determining what type of products a country would trade. The Hecksher-Ohlin model is more comprehensive, because it looks at a wider range of factors of production, including land and capital, thus providing a more enlarged explanation of why and how commercial relations between countries occur.

There are several factors that may impede the successful application of this trade theory. One of the important ones is the political impediment. A dictatorship and not only could use other arguments for commercial trade, including, for example, supporting some of its external partners. Political motivation may drive some of the commercial trades towards particular regions.

From the same political….....

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