International Economics Global Automobile Company

Question :

Research the growth of Toyota from its inception in 1966 to its position as a global automobile company in the 21st Century. Conducting a literature review of Ricardo's comparative advantage benefits, apply the Concept to explain the growth of the Lexus as a luxurious model in the automobile market of the United States. Prepare a PowerPoint presentation that demonstrates the application of Ricardo’s Theory of competitive advantage to explain the growth in trade of Japanese automobile products to the U.S. and exports of United States food, energy, and medical equipment products, as examples, from the United States to Japan.

Answer :

Comparative Advantage

Comparative advantage is one of the economic terms that is used to describe the ability of an economy to product goods and services at lower opportunity cost as compared to the trade partners. If an organization enjoys comparative advantage, it can sell goods and services at a lower price as compared to the key competitors because comparative advantage gives the organization an ability to product at lower cost and hence sell the goods and services at lower prices. Thus, it helps in realizing higher sales margins.

Ricardo’s Comparative Advantages

Ricardo’s theory of comparative advantage states that all actors can be mutually benefited all times if they cooperate and promote voluntary trade. Opportunity cost plays a very significant role in understanding comparative advantage theory. Opportunity cost can be defined as the potential benefit that an individual losses due to selecting a specific option over another. Thus, the opportunity cost or forfeited potential benefit in case of comparative advantage is lower for one company than that of another.

Conti…

The company with the lower opportunity cost losses smallest potential benefits and hence holds comparative advantage. Comparative advantage can also be better understood with the help of trade-offs. For example, comparing two companies in which each of two companies has a trade-off, then the company with the best overall package is the one that enjoys the benefit of comparative advantage. Trade-off represents some benefits as well as some disadvantages.

Illustration

Applying comparative advantage to Lexus

Lexus has achieved tremendous growth in the market of the United States. It was introduced in 1989 in the market of the United States of America. It is also the best selling brand of Japan of premium cars. The brand enjoys comparative advantage in terms of labor cost as well as the advanced technology. The labor cost is comparatively lower than that of its competitors in the United States that provide competitive advantage to the organization to improve its profit margin.

Conti…

The growth rate of Lexus is very imperative. It has also bagged several quality awards. However, due to economic downturn in the United States of America, the sales of almost all organizations have significantly affected. Particularly, the sales of Lexus in the market of the United States have shown downward trends. 2015 was the peak year for Lexus as it sold 344,601 vehicles. But since then, the sale of Lexus has shown fluctuation every year. The organization needs to identify the factors that can help the organization to boost sales of its vehicles.

Comparative Advantage: Japan vs. USA

Japan and the United States of America has comparative advantage over each other in different sectors. The United States of America has comparative advantage in several field such as producing electronic parts and components. In terms of technology, the United States as comparative advantage over Japan because of the advancement in technology as well as technological expertise. The United States has also comparative advantage in medical equipment. Hence, the United States exports electronic part and component as well as medical equipment

Conclusion

Comparative advantage provides benefit to all trading parties if they are engaged in trade with each other. Toyota Motors has comparative advantage in terms of labor cost and advanced technology. The United States of America has comparative advantage over Japan in several field. The United States has comparative advantage in electronic parts and components, medical equipment, and many other fields. Thus, the United States should export such product to Japan in which it has comparative advantage over Japan.

References

Davis, D. R., & Dingel, J. I. (2020). The comparative advantage of cities. Journal of International Economics, 103291. Levchenko, A. A., & Zhang, J. (2016). The evolution of comparative advantage: Measurement and welfare implications. Journal of Monetary Economics, 78, 96-111. Alviarez, V. (2019). Multinational production and comparative advantage. Journal of International Economics, 119, 1-54. Witt, M. A., & Jackson, G. (2016). Varieties of Capitalism and institutional comparative advantage: A test and reinterpretation. Journal of International Business Studies, 47(7), 778-806. Costinot, A., Donaldson, D., & Smith, C. (2016). Evolving comparative advantage and the impact of climate change in agricultural markets: Evidence from 1.7 million fields around the world. Journal of Political Economy, 124(1), 205-248.