What is the principle of comparative advantage?

Asked By: Yuqi Fouto | Last Updated: 12th May, 2020
Category: business and finance job market
4.1/5 (30 Views . 30 Votes)
In economics, comparative advantage refers to the ability of a person or nation to produce a good or service at a lower opportunity cost than another person (or nation). The term “comparative advantage” is usually attributed to David Ricardo.

Click to see full answer

In this regard, what is the principle of comparative cost advantage?

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. Note, this is different to absolute advantage which looks at the monetary cost of producing a good.

Also Know, what do you mean by theory of comparative advantage? Comparative advantage is an economic term that refers to an economy's ability to produce goods and services at a lower opportunity cost than that of trade partners. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

In this way, what are the principles of comparative advantage?

Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. Opportunity cost measures a trade-off. A nation with a comparative advantage makes the trade-off worth it. The benefits of buying its good or service outweigh the disadvantages.

What is Ricardo's theory of comparative advantage?

Comparative advantage, economic theory, first developed by 19th-century 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.

30 Related Question Answers Found

What are examples of comparative advantage?

Taking this example, if countries A and B allocate resources evenly to both goods combined output is: Cars = 15 + 15 = 30; Trucks = 12 + 3 = 15, therefore world output is 45 m units. It is being able to produce goods by using fewer resources, at a lower opportunity cost, that gives countries a comparative advantage.

What is an example of absolute advantage?

Absolute advantage refers to the ability of a nation to produce a product or service more cheaply than another nation. For example, India has an absolute advantage in operating call centers compared to the Philippines because of its low cost of labor and abundant labor force.

Who created comparative advantage?

David Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries engage in international trade even when one country's workers are more efficient at producing every single good than workers in other countries.

What is the difference between comparative advantage and competitive advantage?

Competitive Advantage results when a strategy is put in place that differentiates an organization from another. Comparative advantage occurs when economies of scale provide a less costly way of doing something.

What is the source of comparative advantage?

1. The quantity and quality of factors of production available for example some countries have an abundant supply of good quality farmland, oil and gas, fossil fuels. Climate and geography have key roles in creating differences in comparative advantage.

What are the limitations of the theory of comparative advantage?

A country has a comparative advantage if it can produce a good at a lower opportunity cost than another country. A lower opportunity cost means it has to forego less of other goods in order to produce it.

The theory of comparative advantage.
Textiles Books
TOTAL 4 8

What is the law of comparative advantage and why is it important in international trade?

The existence of a comparative advantage allows both parties to benefit from trading, because each party will receive a good at a price that is lower than its opportunity cost of producing that good.

What is the difference between absolute advantage and comparative advantage Brainly?

What is the difference between absolute advantage and comparative advantage? Absolute advantage is the ability to produce a good or a service at a lower production cost than competitors. Comparative advantage is the ability to produce a good or service at a lower opportunity cost than competitors.

When a country has a comparative advantage?

When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods.

What is the theory of comparative cost?

The Comparative cost theory is the basis of international trade. It explains that “it pays countries to specialize in the production of those goods in which they possess greater comparative advantage or the least comparative disadvantage.”

What is national competitive advantage?

Michael Porter's Diamond Model (also known as the Theory of National Competitive Advantage of Industries) is a diamond-shaped framework that focuses on explaining why certain industries within a particular nation are competitive internationally, whereas others might not.

Is comparative advantage still relevant today?

Ricardo's "comparative advantage" still holds true today. The 19th-century British economist David Ricardo recognized that even when a nation is more efficient than another at producing all goods, it benefits by focusing on the one for which it is internally most efficient, and trading for the others.

What is the difference between absolute advantage and comparative advantage quizlet?

Absolute advantage is the ability to produce a good using fewer inputs than another producer, while comparative advantage is the ability to produce a good at a lower opportunity cost than another producer (reflecting the relative opportunity cost).

What are the benefits of trade?

The advantages of trade
Trade increases competition and lowers world prices, which provides benefits to consumers by raising the purchasing power of their own income, and leads a rise in consumer surplus. Trade also breaks down domestic monopolies, which face competition from more efficient foreign firms.

How do you solve comparative advantage?

A four step solution to solving the comparative advantage and gains from trade problem.
  1. Determine the opportunity costs of production.
  2. Figure out who has the comparative advantage.
  3. Have each country specialize in their comparative advantage.
  4. Figure out an allocation that makes each country better off.

Can a country have comparative advantage in all products?

In international trade, it is not possible for a country to have a comparative advantage in the production of all goods. One country can, however, have an absolute advantage in producing all goods. A country that has an absolute advantage with respect to specific goods is simply the best at producing those items.