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Arguments in Support of the Theory of Comparative Advantage - Term Paper Example

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 The paper "Arguments in Support of the Theory of Comparative Advantage" concern the theory which is a milestone of man’s search for the most “rational” means of production. The concept becomes weaker since the global production process becomes more complex, and labor becomes more specialized. …
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Arguments in Support of the Theory of Comparative Advantage
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Download file to see previous pages If a country is relatively more efficient in the production of a good than another country then it has comparative advantage in the production of that good. However, the theory itself is also one of the most commonly misunderstood principles. Suranovic lists that one of its sources of “misunderstandings” derives from its property of being counter-intuitive, that is, many results from its formal model are contrary to simple logic. Secondly, the theory is easy to be confused with another concept regarding advantageous trade, known in trade theory as the theory of absolute advantage. This confusion between these two concepts leads many people to believe that they have understood comparative advantage in full when in reality, it is absolute advantage that they understand. Finally, the theory of comparative advantage is all too often presented only in its mathematical form. The use of numerical examples or diagrammatic representations is extremely useful in illustrating the basic results and the deeper implications of the theory. However, it is also easy to see the results mathematically, without ever understanding the basic intuition of the theory (Suranovic 2003).
The theory on comparative advantage was first described by Robert Torrens in 1815 in an essay on the corn trade where he concluded that it was to England's benefit to exchange various goods with Poland in return for corn, even though it might be possible to produce that corn more cheaply in England than Poland. However, the theory is attributed to David Ricardo, who explained it in greater detail in his 1817 book “The Principles of Political Economy and Taxation” and explained the concept on foreign trade in an example involving the same two countries. The theory has been developed in the context of Ricardo’s labour theory of value. ...Download file to see next pagesRead More
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