Reporting in Theory of Comparative Advantage

Theory of
Comparative
Advantage
Deﬁnition
01
Theory of Comparative Advantage
The law of comparative
advantage is popularly attributed
to English political economist
David Ricardo
Comparative Advantage
Comparative advantage is an economy's
ability to produce a particular good or
service at a lower opportunity cost than its
trading partners. Comparative advantage is
used to explain why companies, countries, or
individuals can benefit from trade.
Comparative advantage is one of the
most important concepts in economic
theory and a fundamental tenet of the
argument that all actors, at all times,
can mutually beneﬁt from cooperation
and voluntary trade. It is also a
foundational principle in the theory of
international trade.
02
SOURCES
SOURCES OF COMPARATIVE ADVANTAGE
Land Labor
● Endowment of natural ● Quality labor force

resources ● Quantity of labor
● Climate ● Wage costs of labor
Capital Enterprise
● The quality of capital ● Managerial processes
● The quantity of capital ● Utilising technological change
● Leading R&D
03
Examples
DIVERSITY OF SKILLS
Michael Jordan Joe

Famous athlete His neigbor
COMPARATIVE ADVANTAGE IN
INTERNATIONAL TRADE
David Ricardo famously showed how England and Portugal

both benefit by specializing and trading according to their
comparative advantages. In this case, Portugal was able to
1 make wine at a low cost, while England was able to cheaply
manufacture cloth. Ricardo predicted that each country would
eventually recognize these facts and stop attempting to make
the product that was more costly to generate.
Indeed, as time went on, England stopped producing

wine, and Portugal stopped manufacturing cloth. Both
countries saw that it was to their advantage to stop their 2
efforts at producing these items at home and, instead, to
trade with each other in order to acquire them.
ANOTHER EXAMPLE:
CHINA:
POTATOES
INDIA:
WHEAT
The theory of comparative advantage helps to explain
why protectionism is typically unsuccessful. Adherents
to this analytical approach believe that countries
engaged in international trade will have already worked
toward finding partners with comparative advantages.
If a country removes itself from an international trade agreement,
if a government imposes tariffs, and so on, it may produce a local
benefit in the form of new jobs and industry. However, this is not a
long-term solution to a trade problem. Eventually, that country
will be at a disadvantage relative to its neighbors: countries that
were already better able to produce these items at a lower
opportunity cost.
Downside of
Comparative
Advantage
In international trade, the law of comparative
advantage is often used to justify globalization,
since countries can have higher material outcomes
by producing only goods where they have a
comparative advantage, and trading those goods
with other countries. Countries like China and
South Korea have made major productivity gains
by specializing their economies in certain
export-focused industries, where they had a
comparative advantage.
The Bottom
Line
Comparative advantage is one of the most important
concepts in economics. In classical economics, this idea
explains why people, countries, and businesses can
experience greater collective benefits through trade
and exchange than they can produce alone. However,
contemporary economists have also pointed out that
these gains can be one-sided, or result in exploitation
of the weaker parties.
CONCLUSION:
SUMMARY OF THE
THEORY OF COMPETITIVE
ADVANTAGE
KEY TAKEAWAYS:
● Comparative advantage is an economy's ability to produce a particular
good or service at a lower opportunity cost than its trading partners.
● The theory of comparative advantage introduces opportunity cost as a
factor for analysis in choosing between different options for production.
● Comparative advantage suggests that countries will engage in trade
with one another, exporting the goods that they have a relative
advantage in.
● There are downsides to focusing only on a country's comparative
advantages, which can exploit the country's labor and natural
resources.
● Absolute advantage refers to the uncontested superiority of a country
to produce a particular good better.
END
OF
REPORTING
THANK YOU &
GOD BLESS! <3

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Theory of

● Endowment of natural ● Quality labor force

Michael Jordan Joe

David Ricardo famously showed how England and Portugal

Indeed, as time went on, England stopped producing

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