Nancy Slesar
BUSE (71828)
9/02/2014
Chapter 2
BUSN 100
A) A comparative advantage is when a company/country can manufacture a certain product for a lower cost then another source. To put comparative advantage into perspective, two companies both manufacture cotton for towels. Assuming that company ABC is located in Arkansas, where most of US cotton is grown and company BCD is located in New York City. Company XY has a greater comparative advantage because the cotton is grown locally, unlike company YZ where the cotton must be imported from a different state. All in all, the secret for higher profiting on a certain product means the lower the manufacturing cost, the better. Most of US goods are “Made in China” instead of the US (although India is now leading as the lowest cost manufacturer)
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Aside from the comparative advantage, companies also have to take into consideration the balance of trade, balance of payments, exchange rates, and also countertrade. The balance of trade is made of two components- trade surplus and trade deficit. When a company is sending out (export) more then importing, it is considered a trade surplus. Counteracting that term, trade deficit deals with the import being higher then the export. This trade is highly unfavorable. The exchange rate is when a country’s currency is made relevant to another county’s currency. For example, if Joe from San Diego wanted to go to Mexico to get some tacos (pretending that Mexico only accepts pesos), he would have to go a currency exchange location to trade in his US dollars for Pesos. Countertrade is when goods are exchanged for goods, labor or services. Countertrade does not involve any money. For example, if Joe wanted a sombrero instead of tacos, he could initially