Absolute advantage theory was foremost presented by Adam Smith in his book “ The Wealth of Nations ” in 1776. Smith provided the first construct of a state ‘s wealth. Adam Smith is a gramps of economic sciences because he introduced two of import constructs that many of the new trade theories are based on these two chief constructs, which are specialisation and free exchange ( Cho et al. , 2000 ) . However, many statements were made and many economic experts thought there was a job with the theory of absolute advantage after David Ricardo published the theory of “ comparative cost ” ( aka “ comparative advantage ” ) in the early nineteenth century ( Curry, 2000 ) . Even though Smith and his followings introduced many of import points for the ideas of economic, it is excessively complicated with this simple version of trade theory in today ‘s planetary economic system. In 1990, Michael Porter introduced the diamond theoretical account of new fight theory ( Cho et al. , 2000 ) . These three trade theories are of import in order to do a state or concern successfully. Therefore, the importance of absolute advantage, comparative advantage, and competitory advantage will be discussed exhaustively.

Absolute advantage is the ability to bring forth a good with fewer resources than other manufacturers ( Ayers et al. , 2005 ) . Harmonizing to Joseph A. Schumpeter ( 1954, 374 ) , “ seems to hold believed that under free trade all goods would be produced where their absolute costs in footings of labour are lowest ( Van Marrewijk, 2009 ) . ” Smith suggests that a state should export those goods and services for which it is more productive than other states are, and import those goods and services for which other states have more productive than it is. For case, presume there are merely two states in the world- France and Japan ; there are merely two goods – Wine and Clock wirelesss ; and there is merely one factor of production- Labor. In France, one hr of labour can bring forth either two bottles of vino or three clock wirelesss. In Japan, one hr of labour can bring forth either one bottle of vino or five clock wirelesss. Therefore, the absolute advantage to bring forth vino is France because one hr of labour green goodss two bottles in France, but Japan merely produces one. The absolute advantage to bring forth clock wirelesss is Japan because one hr of labour green goodss five clock wirelesss in Japan while France merely produces three. France is more efficient in the production of vino and Japan is more efficient in the production of clock wirelesss. If these two states are able to merchandise with one another, they both will be better off ( Griffin et al. , 2010 ) .

Comparative Advantage

The theory of absolute advantage makes sense intuitively. Unfortunately, the theory had a job. What if one state had an absolute advantage in both merchandises? David Ricardo solved this job by presenting the theory of comparative advantage, which states that a state should specialise and export those goods and services for which it is comparatively more productive than other states are and import those goods and services for which other states are comparatively more productive than it is ( Griffin et al. , 2010 ) . Therefore, harmonizing to this theory, a state must specialise in order to derive from trade. A state has a comparative advantage if it can bring forth a good at a lower chance cost than could other states. For case, Michael Jordan selected hoops as his calling and economic sciences as his major. He had to do a pick in order to stand out at other big leagues or callings. He chose hoops where he could reflect in with his country of comparative strength. On the other manus, Doug might take longer to cut down paces than other people would take. Even if he can non make anything good, he can still make some things comparatively better than other things. Peoples would still engage him because he would bear down them less than the chance cost of their ain clip. In this instance, Michael Jordan might engage him because the chance cost of his clip would be excessively high. It would be unrelated that whether Michael could make his ain lawn faster ( Ayers et al. , 2005 ) . Even though the comparative advantage is really utile for explicating the grounds of trade and the additions public assistance of the trading spouses by trade, this theory is still uncomplete. There are two jobs in this theory. First, the utmost grade of specialisation can be predicted by this theory, but in some states, they non merely bring forth one good but many import-competing merchandises. Second, the trade based on differences in state productiveness degrees between states, but it did non explicate the being of these differences ( Cho et al. , 2000 ) .

Competitive Advantage

The taking theoretician of competitory advantage theory is Michael E. Porter. Harmonizing to Porter, “ National prosperity is created, non inherited ” . It grows with natural gifts in a state, every bit good as its labour pool, its involvement rates, or its currency ‘s value. The competitory advantage of states is the capacity of its industry to introduce and upgrade to organize a state ‘s fight. Companies benefit from holding place based providers sharply, domestic challengers strongly, and demanding local clients. Geographic bunch or companies concentrations established competitory advantage in different parts of the same industry. Harmonizing to Porter, states are most likely to win in industries where the national ‘diamond ‘ is the most favourable. He believes that success in international trade comes from the four interconnected constituents, which are factor conditions, demand conditions, related and back uping industries, and steadfast scheme construction, and competition. Porter besides concluded that their place environment is the most advanced, ambitious, and dynamic so that states win in peculiar industries ( Cho et al. , 2000 ) .

Companies achieve competitory advantage from Acts of the Apostless of invention. They approach invention in both new engineerings and new ways of making things. Invention can be represented in a new merchandise design, new production procedure, or a new selling scheme. Perceiving an wholly new market chance can lend to make competitory advantage from some inventions. Innovation outputs competitory advantage when rivals are slow to react. For case, in cars and place electronics industries, Nipponese companies focused on smaller and lower capacity theoretical accounts that foreign rivals despised as low net income, low importance, and low attractive force ( Cho et al. , 2000 ) .


The three traditional trade theories were discussed. They are all utile theories that remain in understanding many of industrial and trade policies nowadays. For illustration, when a state considers industrial and trade policies, the comparative advantage theory can be a basic guideline. Because today ‘s universe is much more complicated than earlier, those theories are non satisfactory in explicating the international trade in nowadays state of affairs. The chief end of theoretical account edifice is understand the universe easy by acknowledge the most of import variable or variables ( Cho et al. , 2000 ) .