COMPARATIVE ADVANTAGE

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COMPARATIVE ADVANTAGE

COMPARATIVE ADVANTAGE

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Ricardo was one of the economists who contributed to the theory of comparative advantage. The principle of comparative advantage shows that trade can be beneficial to the parties which are involved in the trade only when they produce goods and service which have different relative costs.  This helped them to have gained on from trade. This principle contradicts the earlier principle by Adam smith of absolute cost which showed how a county can gain benefits if it can be able to produce more output from a unit input than any other country.  But the principle of stress on the presence of opportunity cost in the production process. According to Ricardo the principle of comparative advantage is a kind of specialization where a county engage to production of goods that it can produce at a lower cost compared to other goods or to other countries.  It is a kind of a more specialized production. Let us look at the application of this model in some of the following situations. (Fenestra and Taylor, 2007)