Comparative Advantage
Assignment 1: Comparative Advantage
Eco 305 – International Economics
David Ricardo introduced the law of comparative advantage. This theory proposed that even if one nation is less efficient than the other nation in the production of both commodities; there is still a basis for mutually beneficial trade. This is as long as the absolute disadvantage that the first nation has with respect to the second is not in the same proportion in both commodities. The less efficient nation should specialize in the production and export of the commodity, which its absolute advantage is less. This is the commodity of its comparative advantage. David Ricardo made a brilliant and lasting contribution to economic thought by showing that even if one nation is more efficient than another in producing all commodities, trade between the two nevertheless can be mutually beneficial. His theory of comparative costs is now known as the law of comparative advantage. When a country trades with other countries it’s consumptions possibilities are greater. The population of a country will have a larger gross domestic product to consume and invest if it focuses on the production of goods in which it has a comparative advantage and trades for the goods it maintains a comparative disadvantage. A country has a comparative advantage in the production of any good that it can produce with a smaller sacrifice of some alternative good or goods, that is, at a lower opportunity cost, than can the rest of the trading world. For example: In terms of the number of units of labor and capital necessary to produce a thousand gallons orange juice, country A may use 3 times more of each than other countries. Yet if country A must give up 500 hundred loaves of bread for 1000 gallons of orange juice and can trade the 1000 gallons of orange juice for more than 500 million loaves of bread, country A has a comparative advantage in producing orange juice.
Eco 305 – International Economics
David Ricardo introduced the law of comparative advantage. This theory proposed that even if one nation is less efficient than the other nation in the production of both commodities; there is still a basis for mutually beneficial trade. This is as long as the absolute disadvantage that the first nation has with respect to the second is not in the same proportion in both commodities. The less efficient nation should specialize in the production and export of the commodity, which its absolute advantage is less. This is the commodity of its comparative advantage. David Ricardo made a brilliant and lasting contribution to economic thought by showing that even if one nation is more efficient than another in producing all commodities, trade between the two nevertheless can be mutually beneficial. His theory of comparative costs is now known as the law of comparative advantage. When a country trades with other countries it’s consumptions possibilities are greater. The population of a country will have a larger gross domestic product to consume and invest if it focuses on the production of goods in which it has a comparative advantage and trades for the goods it maintains a comparative disadvantage. A country has a comparative advantage in the production of any good that it can produce with a smaller sacrifice of some alternative good or goods, that is, at a lower opportunity cost, than can the rest of the trading world. For example: In terms of the number of units of labor and capital necessary to produce a thousand gallons orange juice, country A may use 3 times more of each than other countries. Yet if country A must give up 500 hundred loaves of bread for 1000 gallons of orange juice and can trade the 1000 gallons of orange juice for more than 500 million loaves of bread, country A has a comparative advantage in producing orange juice.
References: Brue, S., & Grant, R. (2007). The evolution of economic thought (7th ed.). Mason, OH: Cengage Learning. Carbaugh, R. (2011). International economics (13th ed.). Mason, OH: Cengage Learning. Dornbusch, R., & Fischer, S., & Startz, R. (2008). Macroeconomics (10th ed.). New York, NY: McGraw-Hill/Irwin. Salvatore, D. (2007). International economics (9th ed.). Hoboken, NJ: John Wiley & Sons Inc.