Starting from the early 20th century, there has been a push of more products produced in other parts of the world. More and more people are even working with people from other parts of the country and even the world. This is to emphasize on the point that globalization has an impact on all of us. It would be wise to learn more on how globalization works.
First let’s dive in deeper into the questions of why do nations trade with each other? Why is it that the United States imports things like cars, clothing, and phones? Isn’t it possible to just make them instead? There are a few reasons why this is the case. Countries usually produce more than their population consumes. For example the United States exports wheat to other countries that either do not grow what or needs more of it. Ten years ago the total value of everything that was exported/imported was $16.8 trillion.
Jack Rochel, the CEO and president of Epsilon Electronics Inc., purchases raw materials from other countries and then sells part of his final products internationally. A reason why some countries import and export, is because they cannot produce everything in-house, even raw materials for all of its population. It might even cost too much in labor to make a decent profit on certain products and services. Another variable to consider is the level of know-how on how to properly harvest a certain plant or make a particular product.
Absolute advantage is when a nation has the only source of a product or it can produce more of something using the same number or even fewer resources compared to other countries. Jack Rochel knows that for certain regions like Brazil; they have absolute advantage in coffee beans because of the nature of their soil. Comparative advantage takes place when a country produces at a lower opportunity cost compared to another. Opportunity cost means the products a country has to decline to make so they can specialize in something else. This means they have to sacrifice making another product since they decided to do so in another.
Trade between countries can in fact be calculated. For the past few years now the United States has had a trade deficit. This means that they had bought more goods from the world than what was sold overseas. Jack Rochel is not surprised by this because of high income levels, the United States consumes a large portion of its own domestically produced goods and need to buy some more from other nations to satisfy demand for certain products.