Comparative advantage is when a particular country produces a good or service for a lower opportunity cost than other countries. In other words, it is the ability to produce a good at a lower opportunity cost of the resources used (Guell, 2012).
Nowadays comparative advantage is very important for stabilizing overseas market demand and assuring exports. Chinese manufactured exports are of greater comparative advantage in the world market than in the US market (Hao & Zhao, 2012).
Nineteenth-century English economist David Ricardo propounded the theory of comparative advantage. He argued that in order to boost the economic growth of a country, the particular country should have to focus on the industry in which it has the most substantial comparative advantage.
Ricardo developed this theory to combat trade restrictions on imported wheat in England. He argued that when a high-quality and lost-cost wheat is imported from a country which has the right climate and soil conditions then there is no sense to restrict it. England can acquire more wheat from other countries in a trade that could grow on its own soil. Thus, instead of restriction of import, it should rather export that kind of product which requires more skilled labor and machinery.
This theory explains why trade protectionism doesn’t work in the long run. Local constitutes always give pressure to political leaders to protect jobs from international competition by raising tariffs. However, this doesn’t work in long run, it is only for a temporary fix instead. It says that a country shouldn’t waste its resources on unnecessary industries which hurts only the nation’s competitiveness. Instead, a country should focus on those industries which give a competitive cost advantage.
It is said that a country can increase its output when the theory of comparative advantage is applied
Ricardo considered that countries should specialize on producing that goods and services for which they have a comparative cost advantage. There are two types of cost advantage i.e. absolute and comparative. A country should apply a theory of comparative advantage in order to determine what goods and services it should specialize in producing for increasing its revenue and output.
We can understand the concept and the theory of comparative advantage with the help of the table and figure.
As seen in the table, suppose there are two countries (A and B) that produce only two goods i.e. cars and trucks. Country A can produce 30 motor cars and 6m commercial trucks whereas country B produce 35m motor cars and 21m commercial trucks (see figure 1).
Figure1: Comparative advantage matrix
Figure 2: Comparative and absolute advantage
In this situation, country B has an absolute advantage in producing both cars and trucks. Having said that, it has a comparative advantage in trucks as it is comparatively better at producing them than country A. Country B is 3.5 times better at trucks, and only 1.17 times better at cars than country A. Hence, country B should specialize in manufacturing trucks, leaving county A to produce cars because country B is more productive and find the greatest advantage in truck production (see figure2).
References
Guell, R. C. (2012). The Benefits of International Trade. In R. C. Guell, Issues in Economics Today (sixth ed., pp. 92-93). New York, United States: McGraw-Hill.
Hao, W., & Zhao, C. (2012). The comparative advantage of Chinese manufactured exports. Journal of Chinese Economic and Foreign Trade Studies, 5 (2), 107-126.
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Comparative advantage is when a particular country produces a good or service for a lower opportunity cost than other countries. In other words, it is the ability to produce a good at a lower opportunity cost of the resources used (Guell, 2012).
Nowadays comparative advantage is very important for stabilizing overseas market demand and assuring exports. Chinese manufactured exports are of greater comparative advantage in the world market than in the US market (Hao & Zhao, 2012).
Nineteenth-century English economist David Ricardo propounded the theory of comparative advantage. He argued that in order to boost the economic growth of a country, the particular country should have to focus on the industry in which it has the most substantial comparative advantage.
Ricardo developed this theory to combat trade restrictions on imported wheat in England. He argued that when a high-quality and lost-cost wheat is imported from a country which has the right climate and soil conditions then there is no sense to restrict it. England can acquire more wheat from other countries in a trade that could grow on its own soil. Thus, instead of restriction of import, it should rather export that kind of product which requires more skilled labor and machinery.
This theory explains why trade protectionism doesn’t work in the long run. Local constitutes always give pressure to political leaders to protect jobs from international competition by raising tariffs. However, this doesn’t work in long run, it is only for a temporary fix instead. It says that a country shouldn’t waste its resources on unnecessary industries which hurts only the nation’s competitiveness. Instead, a country should focus on those industries which give a competitive cost advantage.
It is said that a country can increase its output when the theory of comparative advantage is applied
Ricardo considered that countries should specialize on producing that goods and services for which they have a comparative cost advantage. There are two types of cost advantage i.e. absolute and comparative. A country should apply a theory of comparative advantage in order to determine what goods and services it should specialize in producing for increasing its revenue and output.
We can understand the concept and the theory of comparative advantage with the help of the table and figure.
As seen in the table, suppose there are two countries (A and B) that produce only two goods i.e. cars and trucks. Country A can produce 30 motor cars and 6m commercial trucks whereas country B produce 35m motor cars and 21m commercial trucks (see figure 1).
Figure1: Comparative advantage matrix
Figure 2: Comparative and absolute advantage
In this situation, country B has an absolute advantage in producing both cars and trucks. Having said that, it has a comparative advantage in trucks as it is comparatively better at producing them than country A. Country B is 3.5 times better at trucks, and only 1.17 times better at cars than country A. Hence, country B should specialize in manufacturing trucks, leaving county A to produce cars because country B is more productive and find the greatest advantage in truck production (see figure2).
References
Guell, R. C. (2012). The Benefits of International Trade. In R. C. Guell, Issues in Economics Today (sixth ed., pp. 92-93). New York, United States: McGraw-Hill.
Hao, W., & Zhao, C. (2012). The comparative advantage of Chinese manufactured exports. Journal of Chinese Economic and Foreign Trade Studies, 5 (2), 107-126.