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 19 th 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” (web).
The Term Paper on The test of a good theory is how well its stands up in the real world
This paper attempts to prove that the test of a good theory is how well it stands up in the real world. The world is full of problems and some of the greatest problems are found in term of unpredictability. Knowing what will happen as a consequence from doing something now is therefore the essence of good theory because everybody want to be assured that what one has will turn out to be beneficial ...
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” (web Ricado’s Numerical Example).
Another theory that can be easily confused with comparative advantage is known as absolute advantage. While comparative advantage is often represented numerically, absolute advantage is not.
The idea that free trade can be advantageous for countries was based on the concept of absolute advantages in production. Adam Smith discussed this theory in the Wealth of Nations. “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage” (Book IV, Section ii, 12).
In other words if country can import a good at a lower then it would cost to produce, the country should import the good.
Comparative advantage and advantageous advantage do not contradict each other. Both theories are based on the same principle. Free trade is a very important principle in both theories. In the example using Portugal and England both countries would benefit from free trade.
The primary issue in the model by Ricardo is what happens when each country moves from autarky (no trade) to free trade with the other country. What are the consequences from trade going to be? The most important things that we care about are trade’s effects on the prices the goods in each country, the production level of the goods, employment levels in each industry, the pattern of trade, consumption levels, wages and incomes, and the welfare effects. Using Ricardo’s model it shows that in autarky, each country will produce some of each good. Because of technology differences, relative prices of the two goods will differ between countries.
The Essay on International Trade and Comparative Advantage
... matters for trade is comparative advantage, not comparative labor costs. When each nation specializes in goods and services in which it has a comparative advantage measured in ... a price below production cost or below the price the foreign firm charges for the same good in its own country. While these ...
Workers in the technologically advanced country will enjoy a higher standard of living than in the technologically inferior country. The reason for this is that wages are usually based on productivity, therefore in the country that is more productive, workers will receive higher wages. However, technological superiority is not enough to continue production of a good in free trade. In order for a country to guarantee continued production in free trade, the country must also have comparative advantage in production. In other words for a country to be successful in free trade it must maintain comparative and advantageous advantage.
The main point of the Ricardian model is saying that countries will specialize in their comparative advantage good and trade them to the other country such that everyone in both countries will benefit. A real life example of this would be an example of a father and a son working in their garden. Preparation of the garden requires the following tasks. Breaking the soil using the roto-tiller, then the soil must be raked and smoothed. Finally, the seeds must be planted. The objective is to finish the task in the shortest amount of time.
However, this year that father’s seven-year-old son is anxious to help. The father can perform the tasks more efficiently than the seven-year-old son can. The father estimates that it will take him three hours to complete the tasks alone. The father decides to let the son help.
They split the tasks between the two of them. The son’s work is done simultaneously along with the fathers. The complete the garden in two hours instead of the estimated three. In other words it makes sense to employ the less efficient son. Efficiency is enhanced when resources are fully employed. This can be compared to third world countries and countries that are less technologically advanced.
Although they may not be the most efficient at producing any product, if they are able to help out overall efficiency will increase. The best way to do maximize output according to the Ricardian model is to: 1. Fully employ all resources world wide 2. Allocate those sources within countries to each country’s comparative advantage industries 3.
The Essay on Comparative Advantage and Openness to Trade
The openness to trade is the key for economy of country to successfully grow along with the world’s economy. Globalisation is driven by new ideology, concepts and theories creating positive impact on efficiency through innovation, invention in technology and mass production. In modern globalised economy the theory of comparative advantage introduced by David Ricardo can be relative but needs to ...
Allow the countries to trade freely Comparative advantage will help us to achieve a better way of life. We must look at the world and different countries and ask what they can bring to the world market. Comparative advantage is the way of producing goods in the future. The model of comparative advantage shows us what.
