Relative productivity advantage

The term relative productivity advantage refers to the economic transactions of an economy . The specialization in the production of a good in which the country has a high productivity is taken into account under this aspect.

overview

The foreign trade theory

Definition: Foreign trade is the cross-border movement of goods and services in an economy, which comprises the purchase of foreign goods and services (import, import) and the foreign sale of domestic goods and services (export, export).

Historical view

• The foreign trade in the 17th and 18th centuries by the mercantilism prevented to protect the enhancement and preservation of domestic prosperity. Mercantilism's policy was that exports were required and imports were restricted.
• Adam Smith (1723–1790) disagreed with politics and developed his thesis on the demand for free trade in contradiction to the strategies of mercantilism ( An Inquiry into the Nature And Cause of the Wealth of Nations - 1776 ). Nevertheless, the advantage of foreign trade that Smith declared was not economically significant.
• In the 19th century, David Ricardo (1772–1823) expanded his theory of foreign trade through a comparative cost advantage . He published his work ( Principles of Political Economy and Taxation ) in 1817 and developed the Ricardo model , which nowadays plays the role of the classical measures of foreign trade.

Economic consideration:

Foreign trade is viewed from two perspectives:

• From the perspective of the national economy: transactions between one country and another country, a group of countries or the rest of the world
• From the perspective of globalization : transactions between certain groups of countries or between all countries.

In the center of foreign trade of international free exchange of goods (is free trade ) and the results achieved thereby trading gains .

The role of relative productivity advantage in foreign trade

Under certain production conditions, the relative factor endowments and different factor productivities of a country play an important role in the international trade of an economy. Ricardo's economic model explains this aspect clearly in that countries derive their profits from the opportunity costs arising from using their own relative productivity advantages. However, the profit does not depend on the absolute productivity advantage, but on the relative productivity advantage.

Explanation of productivity

productivity

Productivity is derived from the relationship between the generated output volume and the production factors used for this purpose (input).

${\displaystyle {\mbox{Produktivität}}={\frac {\mbox{Ausbringungsmenge}}{\mbox{Produktionsfaktoreinsatz}}}={\frac {\mbox{output}}{\mbox{input}}}}$

In addition to the success factors quality and time, productivity is identified as a classic success and control variable. The following variants can be distinguished under productivity:

Labor productivity: This key figure indicates the ratio of the production volume generated to the labor employed in terms of working hours or the number of employees.

${\displaystyle {\mbox{Arbeitsproduktivität}}={\frac {\mbox{Ausbringungsmenge}}{\mbox{Arbeitseinsatz}}}}$

Factor productivity: Indicator of the relationship between the amount produced and the amount of material used for it.

${\displaystyle {\mbox{Faktorproduktivität}}={\frac {\mbox{Ausbringungsmenge}}{\mbox{Materialeinsatz}}}}$

Capital productivity: The productivity of a country is measured by this measure, which describes the relationship between the output volume and the required capital stock.

${\displaystyle {\mbox{Kapitalproduktivität}}={\frac {\mbox{Ausbringungsmenge}}{\mbox{Kapitaleinsatz}}}}$

Productivity advantage

Comparative productivity advantage

The term productivity advantage was created on the basis of the term productivity. A relatively high productivity of an economy in the production of any good corresponds to the fact that this country has a productivity advantage. Theoretically, import and export are carried out based on this aspect.

Relative productivity advantage:

Relative productivity advantage can then be differentiated from absolute productivity advantage in that it has a better effect on production growth. If one country has the absolute productivity advantage in both goods, it is a natural fact that in international relations that country produces more effectively than the other country and thereby gains more. On the contrary, in this respect a country that has no absolute productivity advantage over a good deserves nothing. This rejects the idea of ​​a foreign trade effect, because an incentive to international trade only exists if a country's production status can be improved. From here on, however, it is considered whether the country has a relative productivity advantage without an absolute productivity advantage. The two countries should, however, specialize in part or entirely in the good for which there is a relative productivity advantage and then export. The specialization effect is then reflected in the increases in production for both goods.

It is questionable whether the country does not deteriorate its supply of goods at all times through foreign trade compared to the state of self-sufficiency. If a country has the absolute productivity advantages for both goods but no relative productivity advantages, it cannot achieve any foreign trade gains from the point of view of the quantitative supply of goods. In this case it can be clearly seen that specialization cannot enable international production growth without a relative productivity advantage. The analysis leads to the statement: A country should export goods for which there is a relative production advantage and import goods which have a relative productivity disadvantage.

It is established in the Ricardo model that foreign trade can optimize international economic prosperity with full specialization in goods with a comparative productivity advantage.

The Ricardo model

In the 19th century David Ricardo broadened Adam Smith's approach of the absolute cost advantage more generally by reducing it to the relative cost advantage, in particular the relative productivity advantage. Ricardo model states that the country can increase its prosperity even without the absolute cost advantage of international trade, as long as it specializes in and then exports the goods that have a relative productivity advantage. As a result of the model, the trade profit is not dependent on the absolute productivity advantage, but on the relative productivity advantage.

Application example

In the following, the relative productivity advantage is explained using an abstract example of country A and country B.

For the example we observe two countries A and B. In these two countries two products are manufactured with the given and equal number of resources. Work is considered the only factor in this example. Country A uses 10 machine hours (MS) for a unit of measure (ME) of good 1 and at the same time 8 MS for one ME of good 2. In the same state, country B uses 5 MS for 1 ME of good 1 and 6 MS for 1 ME of good 2 required. The total resource is 12000 MS each.

Table 1

From table 1 it can be seen that country B has the absolute advantage in both products and country A, on the contrary, has no absolute advantage. Furthermore, we consider the relative productivities in both goods, from which one can immediately understand from the figures that country A has the relative productivity advantage in good 2 at the same time as country B in good 1.

The example reads in two small numerical examples: “Without trade” (before specialization) and “With trade” (after specialization).

Without trade

Let us assume that the two countries conduct their economies without the external exchange of goods. This is only national trade. The two countries each use half of its labor factor for each good. The production distribution is as follows:

Table 2

With trade

Change in production with trade at an exchange ratio of 1: 1

Assumption: Country A completely dispenses with good 1 in order to produce more good 2 because it has a relative productivity advantage with good 2. In this specialization, Country A as well as Country B used their labor factor more effectively. When waiving 1 ME of good 1, country A saves 2MS, which corresponds to ¼ ME of good 2. The same applies to country B, since if 1 ME of good 2 is dispensed with, it saves 1 MS, which can be used for the additional production of good 1. Swap is enforced at the ratio of 1: 1. The free trade effect is presented in Table 3:

Table 3

Production status with trade

Table 4

The specialization and the free exchange of two countries resulted in an increase in the production volume of 250 ME of goods 2.

As you can see from this simple numerical example, international trade in the model leads to a worldwide increase in prosperity. There are economic problems when both countries try to produce or promote the product of the other country.

The Heckscher-Ohlin model

In the Ricardo model , the influence on foreign trade profit from the other factors (except for the labor factor) is not taken into account. For this reason, the Heckscher-Ohlin model was built on the basis of the Ricardo model. In this model, a two-factor model is developed, whereby the different production possibilities can be traced back to different factor endowments (factor productivity). Using this model, a country specializes in the more intensive good and then exports when the production factor is relatively abundant.

Misunderstanding of the relative productivity advantage

"Freetrade is beneficial only if your country is strong enough to stand up to foreign competition."

Problem: International free trade only makes economic sense if the domestic market is strong enough to compete against the foreign.

Ricardo's essential one-factor model is used in international trade. The core idea of ​​the Ricardo model is to determine labor productivity and use its advantages, but could lead to a misunderstanding. The misunderstanding then lies in the fact that the model takes into account a single factor, whereby the cost reduction is based only on falling personnel costs . As a result, it could raise concerns that the country has no advantages other than cheap labor (e.g. efficiency of production or improvement of machine capacity). In this misunderstanding, one then confuses the relative productivity advantage with the absolute productivity advantage.

It is usually understood that a country's ability to export depends only on its absolute advantage. But it is not correct. The absolute advantage and the relative advantage must not be confused with one another. The absolute productivity advantage of an industry over a good is neither needed nor presupposed for the gains of the comparative cost advantage . The reason for this is made clear in the Ricardo model (one-factor model) that the absolute productivity advantage alone cannot influence the comparative cost advantage. This is where the relative productivity advantage comes into play and will indicate that a country can make a profit in international free trade even without an absolute productivity advantage. The trading profit depends in reality not only on the absolute productivity advantage, but also on the relative productivity advantage.

"The competitive advantage of an industry depends not only on its productivity relative to the foreign industry, but also on the domestic wage rate relative to the foreign wage rate."

Relative productivity advantage in connection with comparative cost advantage

Diagram: Representation of the determining factors of price advantage

Given the relative productivity differences between countries, the global supply of goods can be increased through international free trade. The model shows that the differences in productivity also lead to the comparative cost advantage. The more precise relationship is shown in the following diagram.

literature

• Paul R. Krugman, Maurice Obstfeld, Maurice: International Economy: Theory and Politics of Foreign Trade. 7th edition, Munich: Pearson, 2006
• Horst Siebert: Foreign trade. 7th edition, Lucius & Lucius, Stuttgart 2006
• Dieckheuer: International economic relations. 5th edition Oldenbourg 2001
• Horst Wildemann: Quality and productivity: success factors in competition. Edition Blickbuch Wirtschaft 1994
• Paul R. Krugman, Maurice Obstfeld: International Economics: Theory and Policy. 5th edition
• Wolfgang Ströbele, Holger Wacker: Foreign trade: introduction to theory and politics. 2nd ed.
• Michael Kutschker, Stefan Schmid: International Management. 6th ed.

Individual evidence

1. ↑ Vahlens - Large Economic Lexicon - Volume 1
2. ↑ Dieck Heuer: International Economic Relations. 5 ed., Oldenbourg 2001, p. 49
3. ↑ International Economic Relations - Dieckheuer - 5th edition - p. 1
4. ↑ Horst Wildemann: Quality and Productivity: Success Factors in Competition, Edition Blickbuch Wirtschaft 1994
5. ↑ Dieck Heuer: International Economic Relations. 5th ed. P. 56
6. ↑ Dieck Heuer: International Economic Relations. 5th ed. Oldenbourg 2001, pp. 54-56
7. ^ Michael Kutschker, Stefan Schmid: International Management. 6th ed., Pp. 386-387
8. ↑ Dieck Heuer: International Economic Relations. 5th edition Oldenbourg 2001, p. 50
9. ^ Michael Kutschker, Stefan Schmid: International Management. 6th ed. P. 387
10. ↑ Wolfgang Ströbele, Holger Wacker: Foreign Trade: Introduction to Theory and Politics , 2nd edition, p. 26
11. ^ ^{A b} Paul R. Krugman, Maurice Obstfeld: International Economics: Theory and Policy. 5th Edition, p. 23
12. ↑ cf. Horst Siebert: Außenwirtschaft , 7th edition, Lucius & Lucius, Stuttgart 2006