Deardorff the university of michigan this paper is the text of a lecture given on november 20, 1997 to inaugurate the john w. Gregory mankiws principles of microeconomics, 2nd edition, chapter 3. A country has an absolute advantage in those products in which it has a productivity edge over other countries. Does free trade increase unemployment and lower wages. Tutor what were going to do in this video is draw a connection between the idea of opportunity cost of producing a good in a certain country and comparative advantage between countries in a certain good and below, right over here we have a chart, that shows production possibility curves for two different countries and as we see in many economic models, this is a, i would argue. Comparative advantage is an economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors. Explain how international trade creates interdependent relationships between countries. Explain the principle of comparative advantage and how it leads to specialization and gains from trade. Calculate the opportunity cost of producing one unit of a good in terms of another good. Comparative advantage and competitive advantage an economics perspective and a synthesisathens journal of business and economics, january 2015. It examines the kinds of work people do and how much time they spend doing it. Principles of microeconomicsabsolute and comparative. If destroying a hectare of forest allows for producing 163.
Fall term 2019 comparative advantage study questions with answers page 3 of 7 9 4. Feb 25, 2015 in an economy with a greater number of participants trading goods and services, there are more ways to find a comparative advantage and earn more by creating the most value for others. Comparative advantage is a term associated with 19th century english economist david ricardo ricardo considered what goods and services countries should produce, and suggested. This interactive activity illustrates the concept of comparative advantage in three hypothetical situations. Comparative advantage, economic theory, first developed by 19thcentury british economist david ricardo, that attributed the cause and benefits of international trade to the differences in the relative opportunity costs costs in terms of other goods given up of producing the same commodities among countries.
Why people and countries trade this section lays the foundation for why countries and individuals gain from trade. The economic advantage assessing the value of climatechange actions in agriculture. The theory of comparative advantage assumes that the costs remain constant for producing any number of goods. The chapter examines the historical process of how the comparative advantage theory developed from james and john stuart mill to the modern theory, by. A nation with a comparative advantage makes the tradeoff worth it. Economies of scale and comparative advantage youtube. Dec 28, 2015 many economists will tell you that the most important principle in economics is comparative advantage the idea that it is expensive to grow oranges in alaska or to flood rice paddies in saudi arabia, so alaska and saudi arabia should import oranges and rice, respectively, and base local production on the advantages of local conditions. It can be argued that world output would increase when the principle of comparative advantage is applied by countries to determine what goods and services they should specialise in producing. In this example two countries, uk and india produce textiles and books.
Benefits and costs of following comparative advantage. An economics perspective and a synthesis by satya dev gupta there is a considerable amount of controversy about the models of comparative advantage and its applicability to international business, in particular as a guide to the success of nations andor firms in international markets. The theory of comparative advantage states that a country should specialise in the production of good or service in which it has lower opportunity cost and it should import commodities which have a higher opportunity cost of production. It can produce it using less labor than other countries. In fact, someone can be completely unskilled at doing something, yet still have. It is quite common to see misapplications of the principle of comparative advantage in newspaper and journal stories about trade. The second method, called comparative advantage, is a much more difficult concept. According to the theory of comparative advantage, a country will export a good only if a. Choose from 500 different sets of comparative advantage economic flashcards on quizlet. An important impact of institutions on comparative advantage and one that we have ignored to this pointarises due to the impact of institutions on intervening factors that in turn affect trade flows. David ricardo believed that the international trade is governed by the comparative cost advantage rather than the absolute cost advantage.
Benefits of trade and comparative advantage econlib. Pdf comparative advantage, economic growth and free trade. Agricultural productivity, comparative advantage and economic. When asked by mathematician stanislaw ulam whether he could name an idea in economics that was both universally true and not obvious, economist paul samuelsons example was the principle of comparative advantage.
Distinguishbetween absolute and relative advantage. International trade and investment, international finance and macroeconomics. Economics and comparative advantage essay example for free newyorkessays database with more than 65000 college essays for studying. The overall long run results of the study favour the export led growth hypothesis that exports precede the growth in case of all countries except for malaysia, pakistan and sri lanka. Concept in economics that a country should specialize in producing and exporting only those goods and services which it can. Comparative advantages of the senegal section presents results of the senegalese comparative advantage. There are some special features of international trade so we need a separate explanation. A high school economics guide supplementary resources for high school students definitions and basics comparative advantage, on econlib a person has a comparative advantage at producing something if he can produce it at lower cost than anyone else. Given the lack of conclusive evidence on viability of targeted industrial policies in sustainably influencing comparative advantage we exclude these policies as ones potentially hindering or reducing the gains from trade. Learn comparative advantage economic with free interactive flashcards. As a result, even those who learn about comparative advantage often will confuse it with absolute advantage. Most exports contain inputs from many different countries and products can travel across borders many times before a finished good or service is made available for sale to consumers. This is a foundational concept in economics that is used to model international trade and the competitiveness of nations.
Comparative advantage economics online economics online. Now this is an interesting thing, because our intuition might say well whoever has the absolute advantage, maybe theyre the ones that should be producing charms. The existence of fdi is often explained by the concept of comparative advantage based on differences in labour productivities. A country has a comparative advantage if it can produce a good at a lower opportunity cost than another country. In this article we will discuss about the david ricardos theory of comparative cost advantage. Pdf comparative advantage and competitive advantage. Comparative advantage, economic growth and free trade julio lopez gallardo abstract the paper has two objectives. In economics, an entity usually a country, but it could be a region, state, or even a person has comparative advantage over another entity when it can produce a. By the same token, dana has a comparative advantage producing shelter. Comparative advantage using a table video khan academy. Strategies for competitive advantage valueadded ag. Comparative advantage, economic growth and free trade. The theory of comparative advantage states that if countries specialise in producing goods where they have a lower opportunity cost then there will be an increase in economic welfare.
In an update to his popular a concise guide to macroeconomics, david moss explains how the state of the macro economy affects managers, executives, studentsand all the rest of us. There are a lot of theories standing behind the fdi flows. To bring ricardos ideas to the data, one must overcome a key empirical challenge. Countries that specialize based on comparative advantage gain from trade. The term comparative means relative not necessarily absolute. Comparative advantage, economic structure and growth. The following points highlight the nine main factors that cause differences in comparative advantage. Nathan nunn, daniel trefler, in handbook of international economics, 2014. Jun 15, 2017 economies of scale and comparative advantage let us make bigger and better oranges, grapes, and everything else. Mar, 2020 comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. Nation always has a comparative advantage, may or may not have an absolute advantage. Aug 25, 2017 therefore, a country or region will have a comparative advantage over others if it can produce its goods and services at a relatively lower cost or cheaply.
May 01, 2020 comparative advantage latest breaking news, pictures, videos, and special reports from the economic times. Chris can produce 6 sq ydwk of shelter or 12 lbwk of food. Suppose, as ricardos theory of comparative advantage. Ricardos theory of comparative advantage is mathematically correct, not that it is empirically valid. One of the most powerful and straightforward economic concepts is comparative advantage. The second objective is to discuss if an economy that adopts a free market policy. He published this theory of comparative advantage in 1817, in his highly influential book titled on the principles of political economy and taxation.
Before this is done, a short introduction to the theory is given, which is closely linked to the name david ricardo,2 who formulates it in chapter 7 of his main work on the principles of political economy and. Comparative advantage overview, example and benefits. A country is relatively more productively efficient than another. In the examples above, chris has a comparative advantage in producing food, because the opportunity cost of producing food is only half as large as it is for dana. In reality, costs will go down because of economies of scale. Comparative advantage and gains from trade economics. Secondly, countries can and do impose restrictions on trade or barriers to. Comparative advantage blogs, comments and archive news on. Economic costs are known as opportunity cost, which is simply the total amount that one must give up in order to get something, and there are two ways to analyze these types of expenses. This means that if you require 2 hours to make one shirt, then you will spend 10 hours to make five shirts, 20 hours to make ten shirts, etc. The first is to discuss whether developing countries can benefit by specializing according to their comparative advantage. Introduction to comparative advantage it has been said that everythings relative. First, since there is no international currency, we must deal with the problem of exchange rates. That is surely not true, but it definitely is true of comparative advantage.
Having a comparative advantage is not the same as being the best at something. Interestingly, some historians of economics suggest that ricardos editor, james mill, included the theory of. Comparative advantage refers to the relative advantage that one country or producer has over another. International trade and comparative advantage lesson. A lower opportunity cost means it has to forego less of other goods in order to produce it. The benefits of buying its good or service outweigh the disadvantages. The first is to look at them directly if it costs china 50 cents to make a pound of rice, and it costs the united states 1 dollar to make a pound of rice, for example, then china has a comparative. Comparative advantage 1 free download as powerpoint presentation. Strategies for competitive advantage cole ehmke, m. A country has an absolute advantage if it can produce something more efficiently than another country. Relative or comparative advantage is the critical issue.
But economists get really excited about the idea of comparative advantage because of what it implies about international trade. But this is whats interesting when we study comparative advantage. The role of agricultural productivity in economic development is addressed in a twosector model of endogenous growth in which a preferences are nonhomothetic and the income elasticity of demand for the agricultural good is less than unitary, and b the engine of growth is learningbydoing in the manufacturing sector. The driving force or determinants of a countrys comparative advantages include its natural resources, factors of production and the availability of technology bourdet, gullstrand. Its productivity is higher in producing the good than the productivity of other countries in producing it. The theory of comparative advantage is attributed to political economist david ricardo, who wrote the book principles of political economy and taxation 1817. A country will specialise in that line of production in which it has a greater relative or comparative advantage. Comparative advantage is a term associated with 19th century english economist david ricardo ricardo considered what goods and services countries should. Comparative advantage simple and subtle at the same time. The comparative advantage model is simplistic and may not reflect. Study questions with answers university of michigan.
Comparative advantage and gains from trade economics tutor2u. Factors that cause differences in comparative advantage. In this excerpt, moss illuminates david ricardos theory of comparative advantage and how it influences the wealth of nations. Comparative advantage an overview sciencedirect topics. Comparative advantage and economic models essay typing. The source of comparative advantage must be natural elements like climate and mineral deposits.
Basic rule specialise in the goods and services that you are relatively best at. Extension educator, department of agricultural and applied economics university of wyoming overview a competitive advantage is an advantage gained over competitors by offering customers greater value, either through lower prices or by providing additional benefits and service that. Feb 06, 2019 the concept of comparative advantage suggests that as long as two countries or individuals have different opportunity costs for producing similar goods, they can profit from specialization and trade. Competitive advantages are conditions that allow a company or country to produce a good or service at a lower price or in a more desirable fashion for customers. The comparative advantage model is simplistic and may not reflect the real world for example, only two countries are taken into account. An economics by topic detail comparative advantage introduction a person has a comparative advantage at producing something if he can produce it at lower cost than anyone else.
Definition of comparative advantage economics help. As important and simple as this concept is, however, it seldom seems to inform public discussions of international. Even if one country is more efficient in the production of. Describe how factors of production influence the exports and imports of countries. The law of comparative advantage describes how, under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage in an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i. Comparative advantage is when a nation can produce a particular good at a lower opportunity cost than other nations. In economics, an entity usually a country, but it could be a region, state, or even a person has comparative advantage over another entity when it can produce a good at a lower opportunity cost. Note, this is different to absolute advantage which looks at the monetary cost of producing a good. This interactive is intended for use with lesson 26, comparative. This opens up important potential gains from specialisation and trade leading to a more efficient allocation of scarce resources. In economics, a comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country. Countries can benefit from specializing in and exporting the products for which it has the lowest opportunity cost of supply.
That principle was derived by david ricardo in his 1817 book, principles of political economy and taxation. A developing economy, in subsaharanafrica, may have a comparative advantage in producing primary products metals, agriculture, but these products have a lowincome elasticity of demand, and it can hold back an economy from diversifying into more profitable industries, such as manufacturing. The goal of this paper is to assess the empirical performance of ricardos ideas. David ricardos theory of comparative cost advantage. A country has a comparative advantage when a good can be produced at a lower cost in terms of other goods. This fundamental concept in explaining why countries engage in international trade and why they gain from trade can only be understood in terms of relative. The ability of an individual or group to carry out a particular economic activity such as making a specific product more efficiently than another activity. A country has an absolute advantage a country has an absolute advantage in the production of a good if it can produce the good at a lower labor cost and if labor productivity in the good is higher than in another country. Economics is the study of how people decide to use resources on an individual and a collective basis. If both of them focus on producing the goods with lower opportunity costs, their combined output will increase and all of them will be better off. Chapter 22 trade and comparative advantage the production possibility curve is bowed because individuals specialize in the production of goods for which they have a comparative advantage and trade with others.