Comparative advantage

Question 1

Explain Ricardo Anderson’s theory of comparative advantage.

Answer 1

Comparative advantage exists when a country has a ‘margin of superiority’ in production i.e. where the marginal opportunity cost is the lowest. Countries will usually specialise and export (the surplus) products that require inputs to which they are most endowed. If each country specilaises where they have an advantage, then total output can increase and fewer resources are used overall.

Question 2

Assumption of Ricardo’s theory.

Answer 2

-Fixed endowment of resources (no growth or technological/dynamic efficiency).

-Uses the analysis of only two countries with perfectly free trade.

-No transportation costs of imports/exports

-Constant oppurtunity.

However, we must always remember (good evaluation) that the law of comparative advantage has simplistic assumptions which do not hold true in the real world (e.g. no transport costs.

So, the real life application of comparative advantage may yield fewer benefits to the global economy than we suggest in theory.

Question 3

Eval for comparative advantage,

Answer 3

However, we must always remember (good evaluation) that the law of comparative advantage has simplistic assumptions which do not hold true in the real world (e.g. no transport costs.

So, the real life application of comparative advantage may yield fewer benefits to the global economy than we suggest in theory.

Question 4

What is absolute advantage?

Answer 4

Absolute advantage exists when a country, individual, company or region to produce a good or service at a lower cost per unit (monetary terms) than the costs at which any other entity produces that good or service.