Case Study: The Ricardian Comparative Advantage

David Ricardo agreed with both the ideas of Malthus and Smith. Ricardo strongly argued for free trade. The idea of “cooperative advantage” emerged. The simply says that a nation should produce only the goods it best produces, rather than it producing every necessity. Then the nation will be able to buy the good that it needs for cheaper and

International trade affects the economy by increasing the Aggregate Demand (AD), and by becoming a source of inputs for production. International trade based on the theory of comparative advantage will improve efficiency in allocating resources, as well as allow businesses to reach economies of scale - "the situation in which costs per unit of output fall as output increases", consequently reaching competitive prices of international markets (Colander, 2004, p. 428). When an economy involves itself in trade, under the right circumstances, it is able to shift the Production Possibility Curve (PPC) curve outward, and achieve greater levels of output. This increase in production can be achieved through the use of more resources

Chile has a competitive advantage in the forestry sector since pine grows exponentially faster in the southern forests of Chile than in New Zealand, Sweden, and Canada. While Chile has a competitive advantage in the forestry sector, it is not the leading export. Chile’s leading export is the mining sector which makes up 51 percent of the exports, and contributes more than eleven percent to Chile’s GDP. Not only is the forestry and mining sector important to Chile’s exports, but also the fishery sectors; Chile is one of world’s leading exporters of fish and fishmeal. While Chile is a large exporter and focuses on increasing exports, Chile also imports goods. Chile’s main imported good is manufactured goods, such as

If each country specializes in areas where its advantages are greatest or disadvantages are least, the gains from trade will make each country better off than it would be if it remained self-sufficient. [3]

Relative preferred standpoint is the capacity of a country to deliver the different assets that are required by its subjects for and furthermore for import to gain it income. It's a monetary wonder where diverse nations effectively contend to create quality items at low costs. Generation of value items that are extremely modest interest to numerous clients. Such a circumstance has prompted clashes between countries as one country could be delivering a given item and pitches it to their natives at a higher cost than the cost of that comparative item that has been transported in. Such a circumstance has the two favorable circumstances and inconveniences as underneath examined.

As most already know, the Swiss are renowned for their production of high quality chocolates including those of the Toblerone and Lindt brands. “Switzerland has a comparative advantage in the production of chocolate. By spending one hour producing two pounds of chocolate, it gives up producing one pound of cheese, whereas, if it spends that hour producing cheese, it gives up two pounds of chocolate. Thus, the good in which comparative advantage is held is the good that the country produces most efficiently (chocolate). Therefore, if given a choice between producing two goods (or services), a country will make the most efficient use of its resources by producing the good with the lowest opportunity cost, the good in which it holds the comparative advantage, and by trading for the other good.” (Globalization101.org, 2010)

Due to the differences between the countries in its profitable fundamentals; the International Trade occurs. The contracts between the countries consider as the primary driver of the global exchange. These contracts concluded on the basis of the countries beneficial elements and advantages. Each international trade between the countries depends on numerous focal points of this exchange process. The economics and producers effectiveness measured by absolute advantage for these economics/producers. For example; if the producer needs lesser amount of contributions/inputs to provide specific product, then this producer has an absolute advantage in producing

| it is relatively more efficient at producing some but not all goods and services than another country.

Which is cost difference determines the patterns of international trade. Absolute advantage is trade benefits when each country is at least cost producer of one of the goods being traded. In the 1800s, David Ricardo developed the theory of comparative advantage to measure gains from trades. This theory is based on comparative advantage and it states each nation should specialize in production of those goods for which its relatively more efficient with a lower opportunity cost.

When the airplane fell on the island, the characters were forced to adapt to a new environment. Albeit, every survivor brought to the island a particular skill or expertise with them and if put to the service of others could help the group of survivors be better-off. Likewise, each country around the world have their own specializations which help them trade goods and services with other countries with other array of specializations. This is the principle of Comparative Advantage, coined by economist David Ricardo in 1817. David Ricardo argued that when two or more economic

The country can maximize their wealth by putting the resources in the most competitive industries. Government created comparative advantage rather than free trade because now easier moves the production processes and the machines into countries that can produce more goods (Yeager & Tuereck, 1984). However, many countries now move to new trade theory suggests the ability firms to limit the number of competitors associated with economic scale (reduction of costs with a large scale of output) (Krugman, 1992). The comparative advantage occurs when two-way trade in identical products, it will useful where economic scale is important, but it will create problem with this model. As a result, government must intervene in international trade for protection to domestic firms (Krugman, 1990)

In order to understand this model, the situation of autarchy needs to be considered. In this case the equilibrium is given when the PPF is tangent to the highest indifference curve: on this occasion what is produced is also consumed (Salvatore, 2012). Conversely, with trade each nation specializes in the commodity of its comparative advantage: according to the graph below, Nation 1 specializes in Y and the slope of its PPF declines; Nation 2, instead, specializes in X,

Economists use the term absolute advantage when comparing the productivity of one person, firm or nation with that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good (Gans, King, & Mankiw, 1999).

The concept of absolute advantage is one of the most fundamental areas of concern in the study of economics. In its basic meaning, absolute advantage refers to the ability of one individual or party to produce more of a particular good or service than other competitors given the same amount of resources. In this regard, absolute advantage becomes a very important aspect in the concept of international trade as it clearly defines the different areas where countries should specialize in order to maximize their productivity and enhance international trade. The principle of absolute advantage was first elucidated by Adam Smith in his study of international trade using labor and capital as the only factor inputs(Free, 2010).

The principle of comparative advantage provides a simplified theory explaining why free trade is possible, even when one country has an economic disadvantage. Both the Ricardian and Heckscher-Ohlin theories rely on fixed economic assumptions of constant return and perfect competition. However, intuitively the basic principle of business is to increase returns through innovation, improving processes and technology or increasing economies of scale. Organizations understand they control pricing and are price setters, rather than price takers as suggested by perfect competition (Krugman & Obstfeld, 2003). The idea of increasing returns and imperfect competition challenge the foundations of comparative advantage.