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Comparative advantage - Essay Example

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Comparative advantage is used in economics to refer to a party’s ability to produce a certain service or good at a diminished opportunity and marginal cost over the other (Karp, 2005). There are cases where one country may be more efficient in total production of goods…
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Comparative advantage
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Comparative advantage

Download file to see previous pages... rative advantage theory is one of the most important concepts in the theory of international trade and is first mentioned by Adam Smith in his book ‘The Wealth of Nations’. He implied that it is better to buy a commodity from another country if it would cost less than manufacturing it locally, giving the buyer some advantage.
According to Deardorff (2005), David Ricardo formulated the law or model of comparative advantage. The ‘Ricardian model’ was formalized through a simple but compelling numerical example investigating in detail the relative/alternative opportunity as well as advantages, which involved Portugal and England. This was outlined in his book ‘On the Principles of Political Economy and Taxation’ published in 1817. Portugal has potential in cloth and wine production using less labor as compared to producing the same amounts in England. Remarkably, production’s relative costs for the two commodities differ in both countries. Wine production is difficult in England but cloth production more viable. Portugal has ease of production for both commodities. Portugal can produce excess wine and trade it for English cloth. The cost of cloth in England is covered by the cheaper price at which, England obtains wine from Portugal. The conclusion here is that each country stands to benefit through specialization in the good over which, it has comparative advantage by trading it for the other.
Arnaud Costinot (2009) proposes a simple theory to relate to the origins of comparative advantage through international trade where endogenous productivity differs across countries. His core analysis is in determinants of division of labor. Considering a world economy that is composed of two countries that have a continuum of goods as well as a single production factor, which is labor, he asserts that complexity characterizes each good. This complexity in short is the number of tasks to be performed for production of a single unit. Performance of every task ...Download file to see next pagesRead More
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