14 the commodity in country B is relatively higher than the price in country A. As a
result of the excess demand, country B buys the commodity that is relatively cheaper from country A. Thus, the differences in needs between country A and
country B lead to international trade between the two countries. Price in the international market is the price of the balance between world supply and world
demand. Changes in world production will affect the world supply, while the changes in world consumption will affect the world demand. Both of these
changes will ultimately affect the world price.
In Figure 5, Panel A and Panel C shows the equilibrium in country 1 and country 2 before the international trade, the equilibrium price in country 1 is A,
while the equilibrium price in country 2 is A
I
. The international trade will occur if the international price is higher than A and lower than A
I
. If the international price PE is equal to A, then excess demand ED of good B will occur in country 2.
If the international price is equal to A
I
, then excess supply ES of good A will occur in country 1. From Panel A and Panel C, the supply S and demand D
curves will be formed. The S and D curves will determine the price that occurs in the international market E. With trade, country 1 will export the commodity A at
B-E, while country 2 will import commodity B at B
I
-E
I
, with equilibrium occurring at point E.
Figure 5 International Trade Curve Source: Salvatore, 1997
3.2 Concept of Competitiveness
Competitiveness deals with the ability and performance of a firm, sub- sector or country to sell and supply goods and services in a given market, in
relation to the ability and performance of other firms, sub-sectors or countries in the same market. The term may also be applied to markets, where it refers to the
extent to which the market structure may be regarded as perfectly competitive. This usage is not relevant in discussing the extent to which individual firms are
“competitive”. Analysis of the comparative and competitive advantage is an approach, which is often used as an indicator for measuring the competitiveness of
a commodity. The concept of competitiveness in international trade is related to the advantages of one commodity or the ability of one country to produce a
commodity more efficiently than another countries Porter 1990. Many experts Quantity
Price
A
15 agree that in order to measure the competitiveness of a commodity, it is best to
look at an absolute advantage, as well as a competitive and comparative advantage. The absolute advantage is the advantage gained by either country due to the
benefits or advantages of nature natural resources, technology and human resources, so that the production becomes more efficient than in other countries
Putong, 2010.
According to Hady 2004, the theory of absolute advantage is based on several key assumptions, for instance, the factors of production used are labor, the
quality of goods produced from two countries, and exchange or barter without financial compensation, with transportation costs being ignored. International
trade will occur and benefit both countries if each country has a different absolute advantage. Thus, if only one country has an absolute advantage for both products,
the trade will not be lucrative. This is a weakness of Adam Smiths theory of absolute advantage. However, the weakness of Smiths theory is improved or
enhanced by David Ricardos theory of comparative advantage. In this theory, Ricardo stated that international trade occurs when there are differences in the
comparative advantage between countries. Comparative advantage will be achieved if a country is able to produce more goods and services with lower cost
than the other country. The law of comparative advantage states that trade can be carried out by countries that do not have an absolute advantage in both
commodities traded by product specialization to the product that has a smaller absolute loss. In other words, the theory of comparative advantage states that a
nation can improve its economic situation if the country specializes in the production of goods and services that has the highest productivity and efficiency.
Another concept of relevance is competitive advantage. While the concept of comparative advantage states that a country does not need to produce a product,
if the other country can more efficiently produce the good, the concept of competitive advantage is a concept that is not a natural condition must be taken
into inhibitors because the advantages of the country can basically fought and competed with the struggle or effort. The advantages of a country depend
primarily on the ability of firms within the country to compete in providing goods that can compete in the international market Porter, 1992.
The Revealed Comparative Advantage RCA method is often used to analyze competitiveness, more specifically; the RCA is used to analyze the
comparative advantage of a commodity in a specific country. RCA can also be used to measure an export commodity’s performance through evaluating the
commodity’s role in the country’s total exports, compared to the share of the commodity in the world market. In 1965, Ballasa first introduced the concept of
RCA, which assumes that a countrys comparative advantage is reflected from its exports. The concept of RCA has since been widely used in research reports and
empirical studies, as an indicator of the comparative advantage of a product, and further, as a reference for international trade specialization. The competitiveness
of the goods can be reflected from the value of the RCA.
3.3 The Concept of Gravity Model
The gravity model was first introduced by Tinbergen in 1962 and is use to examine the flow of trade between countries. Furthermore, Pöyhönen 1963
