Explain why Japan exports automobiles, while the U.S. exports aircraft.

Question: a. Define absolute advantage and comparative advantage.

ANSWER a):
In 1776, Adam Smith recognized the concept of the absolute advantage under the model of international trade. He defined that if a country is producing a particular good with low resource cost than other country than there is absolute advantage to the country producing the same. For instance if country A is capable of producing food with the lowest labour cost than country B and country B is able to produce furniture with lowest labour cost than country A, thus, both countries can trade with each other to have mutual benefit. Using the concept of absolute advantage both countries can accomplish free trade and gain the benefit of absolute advantage ( Riaz and Bergman, 2010, pg.9 (2)). It can be seen that the country having absolute advantage is utilising smaller amount of resources to produce specific good as compare to other countries and thus there is increase in capability of country to produce more goods and services with the use of same factors of production.

Later, in 1817, David Ricardo identified a flaw in the model of absolute advantage and bought the concept of comparative advantage. The concept of comparative advantage says that countries have capability to produce some goods comparatively better than other countries. The concept of comparative advantage consider opportunity cost than the financial cost and is the path through which country is called as efficient and specialised in production of goods. The specialisation in terms of comparative advantage enhances global production of goods and gives better standards for living to everyone (Riaz and Bergman, 2010, pg.10(1)).David advised that country must produce those goods which are comparatively effective and efficient from other countries.

b. Explain why Japan exports automobiles, while the U.S. exports aircraft? Use the prior definitions of absolute and comparative advantage to assist with your answer.

ANSWER b):
According to Svenson (2020)pg.1(2)),Trade is always a foundation of some advantage.It could be the different geographical or climatic condition that countries are specialised in different industries.Specialisation leads the use of resources in efficient way and thus increases the capacity of producing more.For example countries like India export goods which are more labour intensive as it has very cheap labour.

Likewise,Japan geographic condition and its specialised designing in producing cars which makes it product different satisfying the taste of consumer andgiving it absolute advantage(Kozu et al., pg.11(2)). Moreover, Japan have a very less domestic market of vehicle due to stringent inspection of vehicle make it less worthy in local market and worthy in national market and other big automobile markets such as US and Europe have huge domestic market of automobile due to high demand which make their export of automobiles expensive for other countries. Due to follow up of strict licensing in the automobile market of Japan there is huge market of used car and make the import of used cars of Japan cheaper. Japan export automobiles relatively more than import due to having comparative advantage in the product.

United States have abundance of capital and thus it has comparative advantage in exporting goods of capital intensive.US have comparative advantage in producing sophisticated goods such as aircraft at low cost of opportunity. The aircraft industry requires huge capital and specialisation. US are having leading manufacturers in aircraft production and are considered as home to sector of aerospace. US aircraft industry is competitive and dominant industry and thus has an absolute advantage in manufacturing aircrafts. The aircraft industry in US produces aircrafts in large volume and have economies of scale and delivers aircrafts to airlines of world(air-aerospace.org, 2016, pg.5(7)). The volume of exports of US made aircrafts is more than 78% and US airlines purchase around 15% and thus lead the world.

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