Purchase Solution

the theory of comparative advantage

Not what you're looking for?

Ask Custom Question

Explain unequivocally why the foundation of trade has nothing to do with absolute advantage and only the law of comparative advantage is relevant.

Isn't free trade good for two countries even if one of them has an absolute advantage (in terms of low costs and productivity) in all goods and services produced?

Purchase this Solution
Solution Summary

Briefly summarize the theory of comparative advantage.

Solution Preview

In economics, the theory of comparative advantage explains why it can be beneficial for two countries to trade, even though one of them may be able to produce every kind of item more cheaply than the other. What matters is not the absolute cost of production, but rather the ratio between how easily the two countries can produce different kinds of things. When one entity (be it a firm or a country) is able to produce more efficiently than another entity it has an absolute advantage; that is, assuming equal inputs, the entity with an absolute advantage will have a greater output.
Even if a country has an "absolute advantage" in both industries, it may be x many times more productive than another one and only y times more productive in the other industry, where x is greater than y. In a competitive market, the price of goods reflects the cost of making them, so it is likely that in the country having absolute advantage in both the industries, it costs more to make one unit of one ...

Purchase this Solution
Free BrainMass Quizzes
Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

View More Free Quizzes
Related BrainMass Solutions

  • Factor-Endowment Trade theory

    The HO theory explains the reason for comparative advantage for any goods is due to differences in the supply of factors of production. A country will have comparative advantage in producing goods that used the country's abundant factor.

  • Absolute advantage, Comparative advantage and Ricardian Model

    Theory of Comparative Advantage If a nation is relatively more efficient in production of a good than another nation then we can say that the nation has comparative advantage in production of that good.

  • Theory of Comparative Advantage in Logitech

    152470 Theory of Comparative Advantage in Logitech Use the theory of comparative advantage to explain the way in which Logitech has configured its global operations.

  • Description of comparative advantage and absolute advantage

    The Principle of Comparative Advantage "David Ricardo (1772-1823), in his theory of comparative costs suggested that countries will specialise and trade in goods and services in which they have a comparative advantage. " A country has a comparative

  • Theory of trade and Comparative advantage

    82379 Theory of trade and Comparative advantage I need to have a clear understanding of how the theory of trade and comparative advantage affects Shell Oil company as they continue unfair business practices in Nigeria.

  • Ricardian Model

    Discuss this assertion in the context of the Ricardian model of comparative advantage. This assertion is not true according to the theory of comparative advantage.

  • Trade theory

    In addition, the theory of comparative advantage demonstrates that countries jointly benefit from trade (under the assumption of both goods).

  • Differences - Comparative and absolute advantage

    A country also has an absolute advantage if it can produce more of the good than another country can, with the same amount of resources.

  • Trade Theories

    Comparative advantage theory is also an international trade theory.

  • Global Trade: Principal Theories

    Theory of comparative advantage 3.

View More Related Solutions