The U.S. economy (and that of most other nations) is not a closed system but rather is connected (open) to the economies of many other nations through trade, investment, and other financial activities. These international economic relationships provide important benefits too, and create challenges not only for the national economy but also for entities engaged in international economic activities.

There are a number of reasons nations and entities seek to benefit from international economic activities. Among the most important are the following:

Create Demand: To develop new markets for the sale of goods and services abroad. Exports increase domestic demand, which raises output, revenues, and employment, thus benefiting both entities engaged in export activities and national economic measures.

Create Supply: To obtain commodities not otherwise available domestically (e.g., in the United States), or available only in limited supply. Certain raw materials, like tin, tungsten, and tea, are available only from foreign (i.e., non-U.S.) sources. Other important goods, like oil, are available domestically only in limited supply which must be supplemented with substantial imports. To obtain these economic resources in the quantity needed, entities must import commodities from other countries (economies).

Create Cost Efficiency: To obtain goods and services at lower costs than available domestically. Although certain goods and services may be available domestically, they cost more than if acquired in a foreign country. Thus, in a completely open worldwide economic system, entities will acquire economic resources from the lowest cost provider, wherever located.

Absolute Advantage– From an international economic perspective, absolute advantage exists when a country, business, individual or other entity (hereafter referred to as “entity”) can produce a particular good or service more efficiently (with fewer resources) than another entity. When an entity has an absolute advantage, it uses fewer resources to produce a particular good or service than another entity.

Comparative Advantage- Comparative advantage exists when one entity has the ability to produce a good or service at a lower opportunity cost than the opportunity cost of the good or service for another entity.

1. Opportunity cost is the money value of benefits lost from the next best opportunity as the result of choosing another opportunity. If you choose to do one thing, the opportunity cost is the value of the benefit lost by not doing another thing that would have provided the next best benefit
2. Comparative advantage in the providing of goods or services derives from differences, among other things, in the availability of economic resources, including natural resources, labor, and technology, among entities.
3. Entities should specialize in the goods or services they produce at the least opportunity cost.
4. Entities should trade with other entities for goods and services for which they do not have a comparative advantage.
5. The principle of the comparative advantage-The total output of two or more entities will be greatest when each produces the goods or services for which it has the lowest opportunity cost.

Key Takeaways

• Absolute advantage and comparative advantage are two concepts in economics and international trade.
• Absolute advantage refers to the uncontested superiority of a country or business to produce a particular good better.
• Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners.
• The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production.
• Comparative advantage suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in.

We can cite a number of ways outsourcing improves competitive advantage and, consequently, why more companies are taking advantage of the proposition.

First, there has been an increase in the number and types of capabilities that external product development contractors possess. Suppliers concentrate on mastering and building upon a core set of competencies, so they built to handle the toughest challenges within their domain and continue to offer a broader scope of services.

Second, advances in technology and other innovations make it more advantageous for firms to outsource because of the difficulty in simply keeping up with the latest advances.

Third, even if companies could keep up with changes, it is not cost-effective to make the investments necessary to be on the cutting edge of countless technologies. With ever-shorter times to market and product life cycles measured in months, not years, speed has become a defining competitive advantage for many businesses.

If your business is seeking to achieve a competitive advantage in the most desirable way, we, at Outpost work are here to help you.