Answer to Question 1
British political economist David Ricardo explained why it is beneficial for two countries to trade even though one of them may have absolute advantage in the production of all products. Ricardo demonstrated that what matters is not the absolute cost of production, but rather the relative efficiency with which the two countries can produce the products. Hence, the comparative advantage principle states that it can be beneficial for two countries to trade without barriers as long as one is relatively more efficient at producing goods or services needed by the other. The principle of comparative advantage is the foundation and overriding justification for international trade.
This principle supports the competitive advantage of nations theory. Just as scholars recognized that international business is good for individual nations, they increasingly sought to explain how nations can position themselves for international business success. An important contribution came from Professor Michael Porter in his 1990 book, The Competitive Advantage of Nations. According to Porter, the competitive advantage of a nation depends on the collective competitive advantages of the nation's firms. Over time, this relationship is reciprocal: The competitive advantages held by the nation tend to drive the development of new firms and industries with these same competitive advantages.
Answer to Question 2
FALSE
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