Concept of Competitiveness Competitiveness Analysis and Factors Affecting Trade Flow of Natural Rubber in International Market

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 16 developed the first gravity model equations through the specification of total exports as a function of the Gross National Product GNP and distance between the countries Kien, 2009. Bergstrand 1989 further developed this model by clarifying that it is not only useful for analyzing trade as a whole, but can also be applied to the trade flow of a specific commodity. Moreover, according to Alonso 1987, a strong association can be found in relation to gravity, by replacing the function of the mass with the population and the strength of the gravitational interaction with distance between two countries Yuniarti, 2007. The gravity model is used to analyze the economic factors that affect the flow of trade between two countries. According to Lineman Lapipi, 2005, the gravity model is an econometric model that is used to analyze the effects of economic integration on trade, as well as being an analytical tool that can be used to estimate the value of exported and imported goods in a region. The formulation of the gravity model was adopted from the general equation of Newtons law of gravity, which states, The interaction between two objects is proportional to its mass and inversely proportional to the distance of each object. The statement is applied in the following formula: ��� = � � �� �� ��� where F equals the volume of interaction between the two countries bilateral trade flows, M denotes the size of the economy for both countries, D represents the distance of both countries and G is the constant. Furthermore, through a logarithmic equation, the equation is converted into a linear form for the econometric analysis to provide a general form for gravity models. In this case, the constant G is converted into β0 and GDP is used as a measure for the economy of both countries. Log bilateral trade flow = β0 + β1 log GDP country 1 + β2 log GDP country2 + β3 log distance + ε Thus, the general formula of gravity models according to Bergstrand 1989, Koo, et al 1994 in Oktaviani 2009 is as follows: Tij = f Yi, Yj, Fij where Tij equals the value of trade flow from country i to country j, Y i represents the GDP of country i, Y j is the GDP for country j, and F ij denotes other factors that influence trade between country i and country j. Gravity models present a more empirical analysis of trading patterns compared with other theoretical models, because they predict trade based on the distance between countries and the interaction of the country’s economy. In econometrics, gravity models are empirically proven to be robust by including other factors such as income level, diplomatic relations and trade policies. Initially, gravity model theories had a weak theoretical basis, but over the years they have become very popular and more reliable in empirical studies of international trade flows. Gravity models are very popular for several reasons; first, the gravity model is the modern theory of trade, which is widely used to analyze economic issues in the region. It has been shown to have empirical success because it presents a more