Dear mojito74,
The principle of comparative advantage states that a country should
concentrate its resources on producing the goods that it can produce
most efficiently. It can be mathematically demonstrated that if every
country worldwide adopts this strategy, then global output of all
goods is maximized. Furthermore, if all countries trade their goods in
proportion to the efficiency with which they produce them, then each
individual country's stock of goods is also maximized. This
mathematical law holds true even if some country is less efficient at
producing all kinds of goods than another country. The optimal result
is achieved when each country distributes its manufacturing resources
in proportion to the efficiency with which it manufactures each
product.
The Economist: Economics A-Z: Comparative Advantage
http://www.economist.com/research/Economics/alphabetic.cfm?LETTER=C#COMPARATIVE%20ADVANTAGE
Since comparative advantage is a macroeconomic theory, it does not
bear directly on the microeconomic decisions of Water USA. After all,
if mineral water is produced in America disproportionately to its
efficiency of production, who is to say that Water USA must scale back
its output? This might well happen elsewhere, in a centralized
economy, but Water USA plays in a capitalist economy where market
forces determine the winners and losers. Within the domestic market,
Water USA should simply compete to the best of its abilities.
On the other hand, when Water USA decides to export its product to
Russia, it might like to consider the position of its competitors,
namely the Russian mineral-water producers. A consideration of
comparative advantage, although it cannot directly inform Water USA's
business strategy, may shed some light on the strengths and weaknesses
of the competition. In particular, since Russia is a rapidly
developing but still chaotic market with residual elements of state
subsidization, a close analysis may reveal that Russian mineral-water
production is stronger or weaker than it appears to be, thanks to
price supports and other forms of protectionism.
TradeWatch: Russian Federation: Economic Outlook
http://www.tradewatch.dfat.gov.au/TradeWatch/TradeWatch.nsf/vEconomicWeb/Russian%20Federation
If Water USA is less efficient at producing mineral water than its
Russian counterparts, then it naturally charges a higher price per
bottle, and absent any prestige effects or unusual marketing and
distribution efforts, Water USA will inevitably lose. It is quite
probable, in fact, given Russia's consumer price index, that Russian
domestic mineral water is substantially cheaper than Water USA's
product. Furthermore, given the Russian interest in protecting and
promoting its natural resources, it is likely that the price of its
domestic mineral water is artificially depressed by government
subsidies. As Russia's economy develops, however, and its industries
are further privatized at the same time that consumer prices naturally
increase, the Russian mineral-water producers will increasingly be
subject to natural market forces, which means that Water USA should
see its prospects improve.
Because American industry is much more highly automated than the
Russian equivalent in every sector, and because mineral water is a
product that can be produced mechanically with minimal human
intervention, Water USA is bound to be a more efficient producer, at
least in the medium term, than its Russian competitors. In sum, the
lesson for Water USA's executives is that they should not despair.
Despite current circumstances, the liberalization of the Russian
economy and marketplace will tend to promote the principle of
comparative advantage, which in turn will be to the detriment of the
inefficient Russian mineral-water producers and to the benefit of the
efficient American mineral-water producers. This assumes that the
Russians are more efficient at producing petroleum and agricultural
products than they are at bottling and marketing mineral water, which
is most likely true at present and in the medium-term outlook.
If you feel that my answer is incomplete or inaccurate in any way, please
post a clarification request so that I have a chance to meet your needs
before you assign a rating.
Regards,
leapinglizard
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