Comparative Advantage

Only available on StudyMode
  • Download(s) : 482
  • Published : February 27, 2002
Open Document
Text Preview
The theory of comparative advantage is perhaps the most important concept in international trade theory. As the economies that exist in our world our becoming increasingly more intertwined, it is becoming even more important. Nearly every country in the world depends on other countries to supply them with goods that they cannot produce in their own country. I believe that comparative in necessary in today's economy. In this paper I am going to discuss comparative advantage and it's effect on globalization.

The idea of comparative advantage dates back to the early 19th century. The model that is used to describe the theory is known as the "Ricardian Model". David Ricardo believed that the best way to describe the theory is by using numerical values. In his example Ricado used two countries, England and Portugal. The goods being produced are cloth and wine. Ricardo assumed that Portugal was more productive in producing the two goods. Ricardo then went on to explain that if England specialized in producing one of the two goods, and if Portugal produced the other, then the total output of the world would rise. The countries should choose the product that they want to specialize in by which country had a comparative advantage in production. In order to identify a country's comparative advantage good, requires the opportunity cost to be identified.

Opportunity Cost refers to the "single most valuable opportunity given up when a choice is made, the opportunity cost is your next best alternative or your trade off"( A country is said to have a comparative advantage in the production of a good, if it can produce the good at a lower opportunity cost than another country. "Therefore, England would have the comparative advantage in cloth production relative to Portugal if it must give up less wine to produce another unit of cloth than the amount of wine that Portugal would have to give up to produce another unit of cloth"(,...
tracking img