Answer to Question 1
Absolute advantage holds that different countries produce some goods more efficiently than other countries; thus, global efficiency can increase through free trade. Based on this theory, Adam Smith questioned why the citizens of any country should have to buy domestically produced goods when they could buy those goods cheaper abroad. But what happens when one country can produce all products at an absolute advantage? David Ricardo examined this question and expanded on Adam Smith's theory of absolute advantage to develop the theory of comparative advantage. Ricardo reasoned that there may still be global efficiency gains from trade if a country specializes in products that it can produce more efficiently than other productsregardless of whether other countries can produce those same products even more efficiently.
Answer to Question 2
An obvious limitation of strategic alliances relates to the distribution of earnings. Because the
partners share risks and costs, they also share profits. Of course, this aspect of collaborative
arrangements is known ahead of time and is virtually always negotiated as part of the
original agreement. However, there are other financial considerations beyond the basic distribution of earnings that can cause disagreement. The partners must also agree on the proportion of the joint earnings that will be distributed to themselves as opposed to being reinvested in the business, the accounting procedures that will be used to calculate earnings or profits, and the way transfer pricing will be handled.
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