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Comparative Business Analysis Example Report

This is an example of business analysis report comparring the two businesses in the two countries.

Comparative Business

This law states that two businesses can gain from trade when each specializes in the product in which it has lowest opportunity costs. Opportunity cost is the cost of one use for resources rather than another.

Comparative Business Analysis

Comparative Advantage

Introduction:

In accordance with the law of comparative advantage it means that the two countries can get benefit from trade when each specializes in the industries in which it has lowest opportunity costs.

 

When two countries produce the same two goods, and each has an absolute advantage in the production of one good, then it is easy to show that specialization will lead to an increase in their combined output. Specialization and trade can still be mutually advantageous, however, even if one country has an absolute advantage in the production of both goods. This situation will ~rise if the countries find they can obtain the good they produce less efficiently at lower opportunity cost by importing them.

 

Explanation

The principle of comparative advantage can be shown by an arithmetical example. Assume that in Year 10 country X is more efficient in the production of both lorries and wheat. If each country devotes half its resources to each industry the assumed daily production totals are as shown below.

 

Year 10

Lorries

Wheat (tons)

Country X

20

200

Country Y

10

150

Total

30

350

 

In terms of resources used, the costs of production in both industries are lower in country X: it has an absolute advantage in the production of both kinds of good. If we consider the opportunity cost, however, the picture is rather different. In country X the cost of one lorry is ten tons of wheat: that is, in devoting resources to the production of one lorry, country X must sacrifice the production often tons of wheat In country Y, the opportunity cost of one lorry is fifteen tons of wheat, so country X has a comparative advantage in the production of lorries (as well as an absolute advantage).

 

 

However, country Y has a comparative advantage in the production of wheat In terms of the output of lorries forgone, wheat is cheaper in country Y than in country X. Country X could produce another 10 tons of wheat by living up 1 lorry. However, if country Y reduced its production of lorries by one, it could obtain an extra fifteen tons of wheat with the resources released. Thus, country X would better off if it exchanged one lorry for 15 tons of wheat from country Y, rather than increasing its own wheat production.

 

If it produces 15 tons of wheat itself it will have to forgo the production of 1½ lorries: the opportunity cost of domestic production of wheat is higher than the opportunity Cost of import.

 

Country X could transfer some of its resources from the production of wheat to the production of lorries while country Y could put all of its resources into the production of wheat. Total production would now look like this.

 

 

Lorries

Wheat (tons)

Country X

30

100

Country Y

0

300

Total

30

400

 

There is an increase in the world output of wheat.

 

Alternatively, country X might buy 150 tons of wheat from country Y in exchange for 15 lorries. Country X would transfer even more resources to the production of lorries and the total production figures would change again.

 

 

Lorries

Wheat (tons)

Country X

35

50

Country Y

0

300

Total

30

350

 

There has been now been an increase in the world output of lorries.

 

Clearly, the two countries could adjust their trade between these extremes, achieving overall increases in both types of good.

 

There are other advantages to the countries of the world in encouraging free international trade.

(a) Some countries have raw materials surplus to their needs and others have a deficit. A country with a surplus can export them. A country with a deficit must either import them or accept restriction on its economic prosperity.

(b) International trade increases competition amongst suppliers in the world's markets, which benefits consumer undermining monopolies and promoting the pressure to be efficient.

(c) International trade creates larger markets for a firm's output and so some firms can benefit from economies of scale.

(d) There are political advantages because the development of trading links provides a foundation for economic and political links. An example is the European Union and its single market program.

(e) From the consumer's point of view, international trade should provide greater choice, lower prices and better quality products.

Micheal Porter’s “The Competitive Advantage Of Nations” suggest that some nations industries succeed more than others in terms of international competition. UK leadership in some industries (e.g., ship-building) has been overtaken (by Japan and Korea).

According to Michael Porter:

Porter does not believe that countries or nations as such are competitive, but he asks:

(a)   ‘Why does a nation become the home base for successful international competitors in an industry?

(b)   Why are firms based in a particular nation able to create and sustain competitive advantage against the world's best competitors in a particular field?

(c)   Why is one nation often the home for so many of an industry's world leaders?’

 

The original explanation for national success was the theory of comparative advantage. This held that relative factor costs in countries (e.g., the fact that some raw materials are cheaper in country A than in country B, but others are cheaper in B than A) determined the appropriateness of particular economic activities in relation to other countries. (In other words, countries should monopolize in what they are best at in relation to other countries.)

 

Porter argues that industries which require high technology and highly skilled employees are less affected than low technology industries by the relative costs of their inputs of raw materials and basic labor as determined by the national endowment of factors.

 

 

Porter identifies determinants of national competitive which are outlined in the diagram below. Porter refers to this as the diamond.

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