StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...

The Theory of Comparative Advantage: Understanding the Gain - Case Study Example

Comments (0) Cite this document
Summary
This study "The Theory of Comparative Advantage: Understanding the Gain " explains the benefits of trade between two countries without any barrier even if one is more efficient at producing goods or services. The study considers two nations “Nation A” and “Nation B” and both producing two goods, cloth…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER97.7% of users find it useful
The Theory of Comparative Advantage: Understanding the Gain
Read Text Preview

Extract of sample "The Theory of Comparative Advantage: Understanding the Gain"

Download file to see previous pages  The terms like comparative or relative advantages have often failed to create the same impression as that of absolute advantage and hence this concept of comparative advantage has often been misunderstood. The concept of absolute advantage as described by Adam Smith suggests that a commodity produced cheaper by a foreign nation should rather be bought from that nation and the resources available should be employed in a way which we have some advantage (Bromley et al., 2004, p. 46). This simplicity of absolute advantage has made the concept very popular and easy to comprehend. Moving on to the concept of the comparative advantage given by David Ricardo; the concept is not at all intuitive at first go and will require explicit numerical examples for a better explanation.
To begin, we consider two nations "Nation A" and "Nation B" and both producing two goods, cloth which is a manufactured good and fruit wine which can be considered as an agricultural product. Both the products are produced in these countries. As Ricardo had assumed, we start with Nation A which can produce fruit wine efficiently while Nation B is considered more productive and can produce both cloth and fruit wine efficiently. The main purpose with which the theory of comparative advantage was developed by Ricardo was to identify a country’s comparative advantage. It requires a comparison of production costs across countries (Bromley et al., 2004, p. 50). The main factor which plays the role, in this case, is not just the cost of production or the cost of resources but the opportunity costs of producing goods across countries. 
A country is said to have a comparative advantage in the production of cloth if it can produce it at a lower opportunity cost. The opportunity cost in the given business scenario of cloth production is the amount of wine that must be given up to produce for producing a unit of cloth. If Nation A is in comparative advantage in the production of cloths then the fruit wine production it is giving up to produce another unit of cloth is less than that of Nation B.
The theory of comparative advantage when applied to a modern business scenario, we consider two countries producing two goods using labor as the only factor of production. Here the goods have been considered as a homogeneous output and at the same time, labor is also a homogeneous entity within the same nation. But the same labor is heterogeneous across different countries. Other factors like goods transportation between countries and labor relocation within the country are all been considered costless. Relocation of labor across countries is not possible. Labor is fully employed and it's the labor productivity parameters according to which production technology is being reflected (Bromley et al., 2004, p. 56).   ...Download file to see next pages Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(The Theory of Comparative Advantage: Understanding the Gain Case Study, n.d.)
The Theory of Comparative Advantage: Understanding the Gain Case Study. Retrieved from https://studentshare.org/macro-microeconomics/1500854-the-theory-of-comparative-advantage
(The Theory of Comparative Advantage: Understanding the Gain Case Study)
The Theory of Comparative Advantage: Understanding the Gain Case Study. https://studentshare.org/macro-microeconomics/1500854-the-theory-of-comparative-advantage.
“The Theory of Comparative Advantage: Understanding the Gain Case Study”, n.d. https://studentshare.org/macro-microeconomics/1500854-the-theory-of-comparative-advantage.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF The Theory of Comparative Advantage: Understanding the Gain

Bandura's Philosophy Theory

His memories are an accumulation of yesterdays. In yesterday's are written his dealings to others and to himself. He finds life more meaningful in the lives of others. His reason for living is to serve others because he learns more of himself by dealing, relating with and loving others. Hence his motto in life is: “Do to others what he wants others to do to him.”

Bandura’s theory confirms the reality of the experience. A man needs mirroring of others to tell him whether what he is doing is fine or not. The wife is the best critic of the husband and vice versa. This is what makes marriage a wonderful ground for discovery for the two is made into one yet uniqueness of each is still there.

Band...
7 Pages (1750 words) Coursework

Marx' Understanding of Freedom

Marx’s conception is that if society transitioned from capitalist to socialist thought, this would result in a higher form of civilization. The citizenry should be able to control their own destiny and the morality of others should not be legislated or otherwise controlled by an entity other than the citizenry themselves. Regulations, the lack of personal freedoms, in the name of morality restrict individual and societal sovereignty.

Marx was born a German Jew but lived most of his life in England and France. In these countries, the prevailing liberal political philosophy viewed the concept of freedom as the right for people to make their own choices regarding their lives and property. In today’s terms, this...
10 Pages (2500 words) Essay

International Trade Theory

 Further to this, it is also believed that international trade can bring substantial economic welfare to the countries however still most of the countries do not view it as a favorable thing. Despite having a very promising and bright outlook, international trade has been largely viewed with suspension and it is because of this that governments impose barriers to restrict international trade. There can be many reasons behind this act of imposing restrictions or blocking international trade however there are also benefits on the other side too.

International trade has driven the attention of many of the brilliant minds in economics therefore the origins of the economic theory on international trade owe much to the c...
6 Pages (1500 words) Case Study

Social Theory in a Globalizing Age

A comparison between the followers of social theories and the followers of natural sciences (physics and chemistry) revealed that unlike followers of natural sciences social theorists don’t use any techniques to show the exact knowledge or skill. Instead, they prove their work or idea by suggesting a possible way of explaining the facts or arguments usually called hypotheses (Lemert, 2004).
By hypotheses, social theorists cannot easily prove their argument at a time but they require time to prove it. Social theorists are normally criticized for using the hypotheses. Deconstructionists or postmodernists, rigidly critical theorists, disagree with the criticism by mentioning that any research methodology is not 100% pure a...
10 Pages (2500 words) Assignment

Contemporary American Catholic Homiletic Theory and Practice

...Overview of Contemporary American Catholic Homiletic Theory and Practice Luke 4:16-21 The foundation moment in Christian preaching is written in Luke4:16-21, when Jesus went into the synagogue in Nazareth and stood up to read the scroll of the prophet Isaiah “and he begun by saying to them, ‘today this scripture is fulfilled in your hearing’”. (Luke 4:21) Upon the ripening of time, Jesus stood at that moment as the prophetic speaker proclaiming God’s scriptural Word, declaring the fulfillment of the prophecy in Isaiah in his person. He spoke in revelation of the fulfillment of written words to a congregation, laying down the foundation of Christian preaching that has since been the basic implement in the sustenance and propagation...
6 Pages (1500 words) Case Study

A Comparative Study of the Origins of Ethical Thoughts

Do you know what they dug out? -- Wires! It proves that two thousand five hundred years ago, in the age of Pericles, the Greeks had telephones”. The Jew laughingly retorted: “Recently they were digging in Jerusalem. They dug out nothing. This proves that three thousand years ago when Solomon was the king of Judea, the Jews had the principle of wireless!”

ETHICS AND DIVERSE DEFENITIONS: One of the Dilemmas of the civilized human society was the fight between the soul and the flesh or rather the body and desires. The question is how to divert human energy in an intelligent, controlled way? Searching answers to this question one lands in the premise of ethics, personal as well as social. Ethics (English)...
11 Pages (2750 words) Case Study

Comparative Family Analysis

The second component of this essay will be a comparative analysis with the American family to the Arab family, generally speaking, but also clearly described by Homa Hoodfar, in her book Between Marriage and the Market. This essay will discuss the impact of globalization on different types of families in different societies and cultures. The terms ‘traditional’, ‘modern’ and ‘postmodern’ will be defined, elaborated upon and discussed on a continuum of change. Social change, in the face of globalization, will be discussed in relation to how cultures and families have grown or resisted the forces of globalization. We now turn to an exploration of the types of families in the world and follow...
6 Pages (1500 words) Coursework

Free Cash Flows Theory

These are not hard and fast rules in determining the capital structure which should best affect a firms value. These theories lay down the benefits and the costs when a firm chooses what it sees as an adequate mix to maximise the shareholders value.

One of the implications where this research can lead include the possibility of the effectiveness in maximising shareholder value by employing two or more theories in capital structure decisions. Because these theories are more conditional by nature, probing which combinations when used for capital structure decisions are more effective in arriving at the goal of maximising firm value can be another subject for further research.
The role of capital structure in increasi...
11 Pages (2750 words) Case Study

Management Theory and Practice in the Early Childhood Education Industry

...Management Theory and Practice in the early childhood education industry This Report applies management theory into practice in the early childhood industry, especially in the context of women leaders. Management issues play a significant role in the academic sector, because early childhood professionals need higher levels of motivation in order to avoid burnout . As pointed out in a study by Osgood and Halsall (2007) where they carried out research to examine the position of women in leadership or management positions, a “glass ceiling” exists for women in the academic setting, which could significantly impair motivation. Since many of the individuals employed in the early education sector are women, addressing this issue is even more...
6 Pages (1500 words) Coursework

Comparative Review of Welfare System

In order to compare the welfare system of the three proposed countries, it is important to first develop a comparative method that would guide in comparing the three states. For the purpose of this paper, a binary comparison would be conducted. The implicit comparison would deal with Britain while the explicit comparison would explore the USA and Canada. Thereby a small N’ study would be used, that is, of three countries.
The three countries selected to share a similarity in the form that these countries are a welfare state. This is when welfare is mainly funded by the state. While the USA and Canada focus on the liberal welfare state, the welfare state of the UK is not quite defined.
The comparison of the welfare...
8 Pages (2000 words) Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Case Study on topic The Theory of Comparative Advantage: Understanding the Gain for FREE!

Contact Us