This website uses cookies to ensure you have the best experience. Learn more

Absolute And Comparative Advantage Essay

1542 words - 7 pages

iess_Batch4_A-L

5/11/07

11:14 AM

Page 1

A–L
ABSOLUTE AND COMPARATIVE ADVANTAGE
During the seventeenth and eighteenth centuries the dominant economic philosophy was mercantilism, which advocated severe restrictions on import and aggressive efforts to increase export. The resulting export surplus was supposed to enrich the nation through the inflow of precious metals. Adam Smith (1776), who is regarded as the father of modern economics, countered mercantilist ideas by developing the concept of absolute advantage. He argued that it was impossible for all nations to become rich simultaneously by following mercantilist prescriptions because the export of one nation is another ...view middle of the document...

After exchanging 6C out of 30C, the U.K. is left with 24C, which is equivalent to almost five hours’ labor time. Nations can produce more quantities of goods in which they have absolute advantage with the labor time they save through international trade. Though Smith successfully established the case for free trade, he did not develop the concept of comparative advantage. Because absolute advantage is determined by a simple comparison of labor productivities, it is possible for a nation to have absolute advantage in nothing. In Table I, if the labor productivity in cloth production in the United States happened to be 8 instead of 4, then the United States would have absolute advantage in both goods and the U.K. would have absolute advantage in neither. Adam Smith, however, was much more concerned with the role of foreign trade in economic development and his model was essentially a dynamic one with variable factor supplies, as pointed out by Hla Myint (1977).

I N T E R N AT I O N A L E N C Y C L O P E D I A O F T H E S O C I A L S C I E N C E S , 2 N D E D I T I O N

1

iess_Batch4_A-L

5/11/07

11:14 AM

Page 2

Absolute and Comparative Advantage

David Ricardo (1817) was concerned with the static resource allocation problem when he defined the concept of comparative advantage, which is determined not by absolute values of labor productivity but by labor productivity ratios. Ricardo would have interpreted the numbers in Table I by pointing out that, whereas U.S. labor in wheat production is 1.5 (= 6/4) times as productive as it is in cloth production, the U.K.’s labor productivity in wheat is only one fifth of its labor productivity in cloth. Therefore, the United States has comparative advantage in wheat and by inverting these ratios one can show that the U.K. has comparative advantage in cloth. This pattern of comparative advantage will not be affected if the United Sates has absolute advantage in both wheat and cloth, which will be the case if we raise U.S. labor productivity in cloth from 4 to 8. This is because 3/4 will still be greater than 1/5. The rationale of labor productivity ratios comes from Ricardo’s labor theory of value. Ricardo treated labor as the only source of value, as all other factors of production (such as capital) are also produced by labor. Thus the price of a good (P) is simply equal to the wage rate (w) times the labor (L) used in production, divided by output (Q), as profit is zero in competitive markets: P = (w L)/Q. Because the average productivity of labor is a = Q / L, P = w / a. If the labor market is competitive, the wage rate paid in all industries will be the same. Therefore, the ratio between the price of wheat (Pw) and the price of cloth (Pc) will be equal to the ratio between average productivity of labor in cloth (ac) and average productivity of labor in wheat (aw): [Pw / Pc] = [ac / aw]. This creates a direct link between comparative advantage and relative commodity prices in a...

Other Papers Like Absolute and Comparative Advantage

Bu224 Unit 2 Essay

1491 words - 6 pages in production of trousers, slacks, and jeans? The U.S. has a comparative advantage in producing aircraft, and China has a comparative advantage in producing clothing. Because both countries makes more money by trading the products they have a comparative advantage in. b. Can you determine which country has the absolute advantage in aircraft production? Which country has the absolute advantage in production of trousers, slacks, and jeans

Bu224 Essay

2125 words - 9 pages -wage Asian clothing.” b. Is the policy that is being advocated consistent with the preceding statements about the wages and productivities of American and Asian workers? I do not think that the policy that is being advocated is consistent with the preceding statements about the wages and productivities of American and Asian workers. The representative that made that statement was confusing comparative advantage with absolute

Trade Paper

1718 words - 7 pages market in producing and exporting wheat, the nation would want to limit its import of wheat. Limiting the import of wheat could trigger a trade war. Therefore, finding the balance is very important in international trade for all participants to win. ADVANTAGES OF COMPARATIVE AND ABSOLUTE Comparative advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors

Economics Mankiw

1008 words - 5 pages Chapter III 1. EXAMPLE: Rupert can prepare a meal in just 10 minutes; Sampson can do it in 20 minutes. Rupert is able to do the laundry in 3 hours and it takes Sampson 4 hours. Rupert has an absolute advantage in both cooking and doing the laundry, but Sampson has a comparative advantage in doing the laundry. For Sampson, the opportunity cost of doing the laundry is 12 meals; for Rupert it is 18 meals. 2. Comparative advantage is more

International Trade Debate Part I

520 words - 3 pages Objective: Write a 200- to 300-word essay in APA format arguing for or against unrestricted international trade. Some possible platforms on which to write are comparative advantage, gains from trade, World Trade Organization, and trade restrictions. Support your position with three specific reasons.International Trade Debate Part IThe debate over unrestricted international trade is likely to keep economists on their toes. Though there are

Trade Theories

1128 words - 5 pages incentive to create faster and better production methods to increase the specialization. Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit and trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it had but rather by the living standards of its people. Comparative Advantage The challenge to the absolute advantage theory was that some

The Development of the Classical Theories of International Trade Between Countries

1102 words - 5 pages should be encouraged (Anonymous, 2012). His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it had but rather by the living standards of its people (Anonymous, 2012). Comparative Advantage There is a challenge to absolute advantage. Even though it seems obvious that if one country is better at producing one good and another country is better at producing a different good (assuming both countries demand both goods

Trade Relation Between Australia and Indonesia

676 words - 3 pages comparative advantage comes in hand. A country is said to have a comparative advantage in production of a good if it can produce better at a lower opportunity cost than another country. In the article above Australia are willing to form relationships and trade with Indonesia, due to the advantage of their economy. There are an estimated 15,000 Indonesian studying in Australia where they provide 500 million to the Australian economy. Furthermore

Globalization

669 words - 3 pages Absolute Advantage Theory and the Comparative Theory. The Absolute Advantage Theory was created by Adam Smith in 1776 (Hill, 2009) and stated that a country that produces a product efficiently has an absolute advantage over other countries and should trade the product. Smith also argued a country that can purchase a product at a lower cost should never produce at home. According to Hill (2009), the Comparative Advantage Theory was developed by

Comparative Advantage

1148 words - 5 pages absolute advantage over Brazil in both of these goods in truth it costs more to produce the computers in the US as compared to the costs in Brazil. If sees this as an opportunity cost for every 100 cars the US produces it loses the production of 666 computers. Brazil has an opportunity cost of 1000 computers for every 100 cars produced. In this scenario Brazil is better if it produces computers and the US is better if it produces cars. In an

Microeconomics

3502 words - 15 pages and the opportunity cost of a car in country B is 300 units of cotton. In this example: (a) Country A has a comparative advantage in cotton (b) Country B has a comparative advantage in cotton (c) Country A has an absolute advantage in cotton (d) Country B has an absolute advantage in cotton Question 6 The diagram below represents the production possibilities curves for Mario and Lauren. Make the following assumptions about the two

Related Essays

Comparative Advantage Vs. Absolute Advantage Essay

612 words - 3 pages Explain comparative advantage, absolute advantage and explain what that has to do with today’s economy. A country has an absolute advantage in the production of a good relative to another country if it can produce the good at lower cost or with higher productivity. Absolute advantage compares industry productivities across countries. In the case of Zambia, for instance, the country has an absolute advantage over many countries in the

Protectionism Essay

656 words - 3 pages costs and boost profits. Absolute advantage can be determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything. In that case, according to the theory of absolute advantage, no trade will occur with the other party. It can be contrasted with the concept of comparative advantage which refers to the ability to produce a particular good at a lower opportunity cost. For example, Party

World Trade Organization Essay

413 words - 2 pages . There are several trade topics available to read about on the WTO website. The one that stands out to me is the goods section. This section covers anything to do with goods, such as anti-dumping, agriculture, tariffs, and technical barriers. The most important thing that I have learned from this website was what the WTO is and what it does. DEFINE absolute and comparative advantage. Absolute advantage- In economics, the principle of

Eco 561 Week 2 Essay

1316 words - 6 pages partner in a deal holds absolute advantage in all areas of production- that is, one partner makes products cheaper, better and faster than its trading partner”. My interpretation of this definition is that a country, for example the Netherlands, will always have a comparative advantage of the flower industry even if another country can produce the same product for less. They will have this advantage because the Netherlands are known and thought of as