BUS101: Introduction to Business

Absolute advantage and balance of trade are two important aspects of international trade that affect countries and organizations.

LEARNING OBJECTIVES

Explain the principles of absolute advantage and balance of trade

KEY TAKEAWAYS

Key Points

• Absolute advantage: In economics, the principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources.
• Net exports: The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports.
• Advantageous trade is based on comparative advantage and covers a larger set of circumstances while still including the case of absolute advantage and hence is a more general theory.

Key Terms

• advantageous: Being of advantage; conferring advantage; gainful; profitable; useful; beneficial; as, an advantageous position.
• Absolute advantage: The capability to produce more of a given product using less of a given resource than a competing entity.

In the drive for international trade, it is important to understand how trade affects countries positively and negatively – both how a country's imports and exports affect its economy and how effectively the country's ability to create and export vital goods effects the businesses within that country. Absolute advantage and balance of trade are two important aspects of international trade that affect countries and organizations.

European Free Trade Agreement: The European Free Trade Agreement has helped countries trade internationally without worrying about absolute advantage and increased net exports.

Absolute Advantage

In economics, the principle of absolute advantage refers to the ability of a party (an individual, a firm, or a country) to produce more of a good or service than competitors while using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything; in that case, according to the theory of absolute advantage, no trade will occur with the other party. It can be contrasted with the concept of comparative advantage, which refers to the ability to produce a particular good at a lower opportunity cost.

Balance of Trade

The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports in an economy over a certain period. A positive balance is known as a trade surplus if it consists of exporting more than is imported; a negative balance is referred to as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance.