Share
Explore BrainMass

Comparative Advantage

Comparative advantage was developed by David Ricardo and is when a country can produce a certain good with less forgone output of another good than another country¹. Comparative advantage is therefore based on the lowest opportunity cost, as opposed to the lowest absolute cost. A country can have absolute advantage in all goods, which is when a country can produce a good at a lower absolute cost than another country, but can never have a comparative advantage in all goods.

World output will increase if countries specialize in the production of goods that they have a comparative advantage in and trade for other goods. This is beneficial to both parties of trade. Comparative advantage shows that everyone can benefit from trade but follows the assumption that there are few transaction costs and some restrictions to flow of capital. Comparative advantage can only work if countries have different production costs. To identify which country should specialize in a product, the internal opportunity costs should be assessed. Countries must agree on an acceptable rate of exchange for the trade to be mutually beneficial for the countries involved.

Comparative advantage does change overtime because factors that determine a country’s costs of production will change over time. Changes in exchange rates affect the prices of imports and exports, causing changes in demand, which therefore cause fluctuations in comparative advantage.

A contrived comparative advantage for domestic producers is created when the government imposes import restrictions like tariffs and quotas. Comparative advantage is self-reliant because entrepreneurs can create new ways to efficiently produce a product or create a new product entirely that is demanded in different markets¹.

 

References:

1. Baumol, William J. and Alan S. Binder, 'Economics: Principles and Policy'. 2009.

Production possibilities curve and points

1. Why does a production possibilities curve bow out rather than forming a straight line sloping downward from left to right? 2. Out of all of the possible production points along a production possibilities curve, which one of those points does a nation select and why? 3. What does the Heckscher-Ohlin Theory say about wh

Comparative Advantage and Opportunity Cost

1. Intra-industry trade involves countries exporting and importing the same or very similar goods. Why would countries export and import the same or similar products? Please respond in at least 160 words or more. 2. You are an adviser to a foreign government. Until now, government policy has been to severely limit imports, whic

Pattern of Trade and Gains From Trade

1. Consider 2 countries that each produce two goods X and Y defined as follows. HOME FOREIGN X= αLx α=10 X= αLx α=5 Y=βLy β=10 Y=βLy β=10 LH=10 LF=10 Suppose that the home country experiences technological growth in the X sector such that α increases to 12. Describe the impact on the free trade pr

Macroeconomics Research

1. Absolute and comparative advantage: Explain how these concepts describe the benefits and costs of international trade. 2."Invisible hand": What is it and how does it affect the decision-making process in our economic system? 3.Circular flow diagram: Include the government sector in your explanation, a description of the

Edgeworth Box Diagram for a Society of Two People

Using Edgeworth box diagrams for a society of two people, explain why societies that promote market exchange are likely to be more efficient. Are they also likely to be more equitable? Resource: http://www.digitaleconomist.org/ex_4010.html.

Elasticity and Outperforming Command Systems

1) Is it wrong to use the total revenue test for elasticity, when there is a direct relationship between price and total revenue the demand is elastic? 2) Have market systems outperform command systems of economic over the 200 years. 3) The United States is an example of a pure market system of economics without elements of c

Economic costs and benefits of international trade

Explains the economic cost of most international trade less than the economic benefit of that trade for both the companies and countries involved using trade and comparative advantage economic theories. Three paragraphs totaling 360 words.

Healthcare Comparison

The Organization for Economic Cooperation and Development (OECD) provides some of the best data and statistics available for comparative international work. Browse its Web site at http://www.oecd-ilibrary.org/economics/country-statistical-profiles-key-tables-from-oecd_20752288. Compare information between the U.S. and Canada, r

Trade Barrier Reduction

Discuss the historical process of trade barrier reduction. Does anything further need to be done to reduce these barriers?

Heckscher-Ohlin theory

For a world in which international trade would be based only on the differences featured in the Heckscher-Ohlin theory, the shift from no trade to free trade is like a zero-sum game." Do you agree or disagree? Why? The Ricardian model emphasizes on theory of comparative advantage, viewed to be the most important concept in in

Free Trade's Benefits and Detractors

Economists are in almost universal agreement that Free Trade is good for all countries. Why are they in such universal agreement? Other groups in our country, especially labor, are against Free Trade. Why is this the case? Can you propose a way that both groups can get together on this issue? Discuss.

Opportunity cost, comparative advantage, and trade between Kiribati and Tuvalu.

Suppose that Kiribati can produce 1000 tons of breadfruit or 500 tons of fish, and that Tuvalu can produce 750 tons of breadfruit or 1875 tons of fish. a) What is the opportunity cost of 1 unit of fish in Kiribati? Show calculation. b) What is the opportunity cost of 1 unit of fish in Tuvalu? Show calculation. c) Which countr

Answer these five Macroeconomics questions and give reasons.

1. If 12 units of a good are sold when the price is $1 per unit, and 8 units are sold at a price of $1.50 per unit, then demand is a. elastic b. inelastic c. of indeterminate elasticity d. unit elastic 2. A change in demand would be illustrated by a. a drop in price, which causes people to buy more b. an increase in pr

CHAPTER 18. WTO

4.1. (The world trade organization) What is the World Trade Organization (WTO) and how does it help foster multilateral trade? (Check the web WTO Web site at http://www.wto.org/.) 5.2. (arguments for trade restrictions) Firms hurt by cheap imports typically argue that restricting trade will save U.S. jobs. What's wrong with t

Net Welfare Loss From an Import Quota

1. (Reasons for international specialization) What determines which goods a country produce and export? 2. (Import quotas) How low must a quota be in effect to have an impact? Using a demand-and-supply diagram, illustrate and explain the net welfare loss from imposing such a quota. 3. Under what circumstances would the net

Imports vs Domestic Buying

Discuss advantages or disadvantages of buying imports versus buying domestic products in relation to the fashion industry. (you do not have to choose the fashion industry) 1. First, list the definitions of import and export, and give examples of a chosen company and product for 1 import and 1 export item. 2. Advocate either

Microeconomics Overview for Final Exams

1. This question deals with demand and supply and refers you to the table below: a. Given the table, respond to the questions below. It may be helpful to graph the data as you respond to the questions. Price Quantity Demanded/Month Quantity Supplied/Month $5 6,000 10,000 $4 8,000

Opportunity Cost

Suppose that two people, Michelle and James each live alone in an isolated region. They each have the same resources available, and they grow potatoes and raise chickens. If Michelle devotes all her resources to growing potatoes, she can raise 200 pounds of potatoes per year. If she devotes all her resources to raising chickens

Revenue and tariffs

1. If a nation is capable of producing more computers than another nation, given the same factors of production, it is said to have which of the following capabilities? Comparative advantage Basis for terms of trade Absolute advantage Labor theory of value 2. Which of the following is NOT a trade bar

Opportunity costs are assessed.

Use the following table for the given exercises Amount of Beef or computers produced by one worker in a day Canada Japan Beef 6 5 Computers 2 4 1. Which country has the absolute advantage in beef production?

Economics models are compared briefly.The Heckscher-Ohlin theory: The equalization of price of factors has not exhibited any sign of realization. Assuming identical functions of productions between countries is most unrealistic. There exists vast technological gap between developed and developing countries

In the Ricardian model, everyone seems to benefit from trade. However, the Heckscher-Ohlin model seems to show that some lose from trade as well. Who are the losers in the HO model, and how do they not benefit from trade? Ricardo stated that countries specialize in producing those products which they produced best. Countries

World Trade's depictions from the media are referenced.

1. Why does the media attacks world trade? 2. Assume that corn production requires only land and can production requires only labor. The United States can produce either 70 kilograms of corn or 100 cans in an hour. Mexico can produce either 60 kilograms of corn or 20 cans in an hour. Which of the following statement is TR