Guell (2015), in their book Issues in Economics Today, comparative advantage is the ability to produce a good at a lower opportunity cost of the resources used. It gives an ability to sell goods and services at a cheaper price than its competitors and earn a great profit margin. It also explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other.
For instance, moreover a country has a comparative advantage if it can produce a good at a lower opportunity cost than another country. Let’s assume two nation which produce coffee and tea using one of labor. In the table1we assume Nepal can produce 1kg of tea and 4kg of coffee using one labor. Likewise India can produce 2 kg tea and 3 kg coffee using one labor.
Country/Products
Coffee
Tea
Nepal
1
4
India
2
3
Table 1: Comparative advantage
In case of absolute advantage for Nepal is Tea whereas for India also absolute advantage is tea. Whereas in case of opportunity cost, Nepal can produce 1kg of Tea and 4 kg of Coffee and India can produce 2kg of Tea and 3kg of coffee. So Nepal has a comparative advantage in producing of tea as we can see low opportunity cost in tea.
The opportunity cost for India to produce tea 1 kg of tea is 2/3 which is 0.66kg whereas for Nepal it is 0.25kg. It shows Nepal has comparative advantage in producing coffee. If the nation which has higher opportunity cost then they must not produce that products rather country should focus on production of that product in which they have the lower opportunity cost.
David Ricardo (1772-1823) probably got word the legal philosophy of comparative advantage around the first two weeks of October 1816. In his example, Ricardo imagined two countries, England and Portugal, producing two goods, cloth and wine, using labor as the sole input in output. He accepted that the productivity of project (i.e., the quantity of output produced per worker) varied between industries and across countries (Ruffin, 2002). Thus, through free trade Portugal and England can both reduce their labor hours and redirect those resources to their best relative use.
The key implication of the law of comparative advantage is that if free trade is taken into account, then all nations can and will be integrated through the international division of labor. No nation is so poor or ineffective that it cannot earn from free trade.
References
Guell, Robert C. (2015). Issues in Economics Today , 7th edition- 2015 ISBN: 978-0078021817
Ruffin, R. (2002). David Ricardo’s discovery of comparative advantage. History of political economy, 34 (4), 727-748.
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Guell (2015), in their book Issues in Economics Today, comparative advantage is the ability to produce a good at a lower opportunity cost of the resources used. It gives an ability to sell goods and services at a cheaper price than its competitors and earn a great profit margin. It also explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other.
For instance, moreover a country has a comparative advantage if it can produce a good at a lower opportunity cost than another country. Let’s assume two nation which produce coffee and tea using one of labor. In the table1we assume Nepal can produce 1kg of tea and 4kg of coffee using one labor. Likewise India can produce 2 kg tea and 3 kg coffee using one labor.
Table 1: Comparative advantage
In case of absolute advantage for Nepal is Tea whereas for India also absolute advantage is tea. Whereas in case of opportunity cost, Nepal can produce 1kg of Tea and 4 kg of Coffee and India can produce 2kg of Tea and 3kg of coffee. So Nepal has a comparative advantage in producing of tea as we can see low opportunity cost in tea.
The opportunity cost for India to produce tea 1 kg of tea is 2/3 which is 0.66kg whereas for Nepal it is 0.25kg. It shows Nepal has comparative advantage in producing coffee. If the nation which has higher opportunity cost then they must not produce that products rather country should focus on production of that product in which they have the lower opportunity cost.
David Ricardo (1772-1823) probably got word the legal philosophy of comparative advantage around the first two weeks of October 1816. In his example, Ricardo imagined two countries, England and Portugal, producing two goods, cloth and wine, using labor as the sole input in output. He accepted that the productivity of project (i.e., the quantity of output produced per worker) varied between industries and across countries (Ruffin, 2002). Thus, through free trade Portugal and England can both reduce their labor hours and redirect those resources to their best relative use.
The key implication of the law of comparative advantage is that if free trade is taken into account, then all nations can and will be integrated through the international division of labor. No nation is so poor or ineffective that it cannot earn from free trade.
References
Guell, Robert C. (2015). Issues in Economics Today , 7th edition- 2015 ISBN: 978-0078021817
Ruffin, R. (2002). David Ricardo’s discovery of comparative advantage. History of political economy, 34 (4), 727-748.