Essay Title: 

Explain how the concept of comparative advantage works

April 3, 2016 | Author: | Posted in economics, mathematics and economics

Comparative Advantage

The theory of comparative advantages is called sometimes Ricardo ‘s Law Actually , the concept of comparative advantage is used to explain why it is beneficial for two countries (individuals , regions , etc ) to ensure trading without barriers if one party appears to be more efficient at producing either goods or services which are needed by another party Thus , it goes about the ration aimed at defining how easily two parties are to produce different goods . It is noted that the concept of comparative advantage is of great importance for contemporary theory [banner_entry_middle]

of international trade (Ricardo 1945 ) Absolute advantage suggests that each party is able to find an effective productive niche based on absolute advantage meaning that each party is efficient at producing goods and at trading them with other states . Speaking about comparative advantage , it is necessary to outline that even if one party while producing certain goods has no absolute advantages , it is able to specialize and to export its goods with which the country has relative advantage (Comparative Advantage 2004

It is necessary to illustrate on example how the comparative advantage operates . For example , two countries – England and China – are producing clothing and foods . The price for food within England is 0 .60 unites of clothing and , consequently , the price for clothing within the USA is said 2 units of food . In China the price for food is about 1 .67 unites of clothing and the price for clothing is 0 .50 unites of food Therefore , it is apparent that England has comparative advantage at producing food , whereas China has comparative advantage in producing clothes . Thus , it is admitted that in a trading relationship the U .S should allocate at least some of its scarce resources to producing food and China should allocate at least some of its scarce resources to producing clothing , because this is the most efficient allocation of the scarce resources and allows the price of food and clothing to be as low as possible (Suranovic 1997

References

Comparative Advantage (2004 . Retrieved January 26 , 2007 , from HYPERLINK “http /www .econlib .org /library /s /Details /comparativeadvantage .html http /www .econlib .org /library /s /Details /comparativeadvantage .html

Ricardo , David (Murray , J . ed (1945 . The Principles of Political Economy and Taxation . London : Card Catalog

Suranovic , Steven (1997 . The Theory of Comparative Advantage Retrieved January 26 , 2007 , from HYPERLINK “http /internationalecon .com /v1 .0 /ch40 /40c000 .html http /internationalecon .com /v1 .0 /ch40 /40c000 .html

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