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Theory of Comparative Advantage - Essay Example

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Theory of Comparative Advantage

In turn, the countries would have an opportunity to import goods from the country that had an absolute advantage in those goods (Hall and Lieberman 2007). However, in 1817, David Ricardo disputed the postulation of absolute advantage and instead developed and enhanced the claim of comparative advantage (Hall and Lieberman 2007). According to the author, a country obtains comparative advantage if it possesses the ability to produce a particular good and be able to produce the good at lower opportunity than some other country (Carbaugh 2010). Initially, absolute advantage talked and fore so, resources as key to obtaining absolute advantage in production of goods, comparative advantage on the other hand regards opportunity cost as key in production of goods. For instance, Ricardo postulates that , a likely potential trading partner may be perceived to be absolutely inferior in the production of every single good, where more resources per unit of each good may be required than any other country and still have a comparative advantage in some good (Hall and Lieberman 2007; Maneschi 1998). The comparative advantage comes about because the country is inferior at producing some goods than others (Misra and Yadav 2009). At the same time, a nation that possessed absolute advantage in producing everything as it was perceived could still benefit from trade since it would have a comparative advantage only in some but not all the goods. What is comparative theory? Globalisation in the world has postulated that, trade unlike before can be conducted between countries. As a result, trade between countries has become important and necessary for the growth of international economy (Ezeani 2011). In order to understand how countries may end up coming to be trade partners, one theory developed by Ricardo has become important in explaining such relationships. Comparative advantage, which explains how trade relationships between countries may be established, has come out as a key theory in explaining how countries benefit from each other by having goods that they do not produce due to cost matters. Adam Smith emphasised the need of each nation to look for absolute advantage as far as production and consumption of goods is concerned. What when this postulation is analysed in practical sense, then it becomes clear that, absolute advantage may not permit development and healthy growth of trade in the international sphere. Take for example, two countries China and United Kingdom, where China may appear to be inferior in terms production of goods like clothes and aircrafts. In this case, China does not have absolute advantage like United Kingdom, and therefore, the question that can be asked in such scenario, is what China can do, what UK can do, and of course according to absolute advantage theory, there is no way out (Branch 2006). However, another theory that attempt to address this dilemma, which has evolved to become critical in international trade, is the theory of David Ricardo developed in 1817, and the theory is known as comparative advantage theory (Peng 2010). Using the two examples of China and United Kingdom, comparative advantage theory postulate that, though UK may have absolute advantage in production of clothes and aircraft, this does not rule out China as an able country that cannot produce such goods. China may exhibit some efficiency and capabilities in the production of both goods ((Branch 2006)). As a result of having ability ...Show more

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Running head: Theory of Comparative Advantage Theory of Comparative Advantage Insert Name Insert Insert 27 March 2012 Theory of Comparative Advantage Introduction Before Ricardo developed the theory of comparative advantage, the economics world had utilised the theory of absolute advantage…
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