Comparative Advantage

1689 Words Dec 4th, 2012 7 Pages
Assignment 1: Comparative Advantage

Eco 305 – International Economics

David Ricardo introduced the law of comparative advantage. This theory proposed that even if one nation is less efficient than the other nation in the production of both commodities; there is still a basis for mutually beneficial trade. This is as long as the absolute disadvantage that the first nation has with respect to the second is not in the same proportion in both commodities. The less efficient nation should specialize in the production and export of the commodity, which its absolute advantage is less. This is the commodity of its comparative advantage. David Ricardo made a brilliant and lasting contribution
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Many people and governments are still in support protectionist policies, but the trend is pushing toward more global economies and open markets. In general, most world leaders view the economic alliance of nations through common markets in a positive light, as evidenced by the increasing number of common markets around the globe. The economic benefits of free international trade have led to the creation of multinational treaties where all or most barriers to trade have been lifted. The primary goal of these treaties is to create a “common market” that is shared among the member nations. The two most important common markets are the European Union and the zone created by the North American Free trade Agreement. International trade has two important characteristics that set it apart from trade within the boundaries of any given country. These two productive factors can sometimes be an opportunity or threat. First, each country, or group of countries has its own currency. Producers in any given country want to be paid in that currency, and buyers want to use it to pay for goods and services. Second, nationalism, regionalism, and political objectives are inevitably injected into trade relationships among nations. All sorts of restrictions to trade are enacted by governments to further political ends, even though the trade, if allowed, would have been in the best
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