Preview

Absolute and comparative advantages (Smith and Ricardo theories)

Good Essays
Open Document
Open Document
436 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Absolute and comparative advantages (Smith and Ricardo theories)
1- Describe Adam Smith's concept of absolute advantage and David Ricardo’s concept of Comparative Advantages. Are those concepts still useful in the 21st century’s Business environment?

The concept of absolute advantage is the ability of a country to use less resources (inputs) to produce goods/products than any other country. For Smith, a country should specialize in the production of the product for which it has an absolute advantage and should buy at lower price others goods from other countries.
Smith argued in favor of globalization because if boarders are open, countries will specialize in the output for which they have an absolute advantage in order to exchange it between each other. And so, the global production will increase.

The concept of comparative advantages argues that even if a country doesn’t have an absolute advantage, it should trade and specialize in the production of a product for which it has a comparative advantage, which means a lower relative price.
So even without an absolute advantage, a country should specialize in goods which have comparative advantages and exchange, it will increase the global production, without any additional resources.

By the 21st century, even if the concept of absolute advantage seems out of date, it is always valid, because we still use it. If a country has an absolute advantage on a product it will definitely concentrate on it and produce it competitively in order to export the most it can. But this theory suggests that every country has an absolute advantage and unfortunately it is not true. So, if a country has no absolute advantage, does it mean that it can’t participate in global trade? That is one of the reason that leads Ricardo to write his concept of comparative advantages. He argues that even if a country doesn’t have any absolute advantage, it can always focus on the production of the product which has a lower relative price, compare to the other country, and it will make profits, in

You May Also Find These Documents Helpful

  • Good Essays

    Intb 300 Portfolio Essay

    • 656 Words
    • 3 Pages

    Comparative advantage is the “theory that countries should specialize in the production of goods and services they can produce most efficiently” (Hill, McKaig, pg.170). Many countries are able to produce goods better than others due to factor endowments which are brought out in the Heckscher-Ohlin Theory and in Porter’s Diamond. Factor endowments are the extent to which a country is endowed with resources such as land, labour and capital (Hill, McKaig, pg.177). Costs are lowered if the resource is more abundant. With the case in Brazil, an increase in production due to more land available allowed for the increase in exports to China. This gave Brazil the competitive edge over the US who experienced a shortage in production of soybean due to drought.…

    • 656 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Within the international trade the task of comparative advantage is massive and it can be referred to other as the capability of a country or company to manufacture a particular good or service at a lower opportunity cost than the other competitive country or company.…

    • 903 Words
    • 4 Pages
    Good Essays
  • Good Essays

    1. Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade between individuals or countries? Is it absolute advantage or comparative advantage? Why?…

    • 743 Words
    • 3 Pages
    Good Essays
  • Good Essays

    “Comparative Advantage” is one of the most essential items and concepts in international trade. This concept, Comparative Advantage, focus on the idea that one country is more capability, better resources, and has distinct advantages in producing one good or service in comparison to another country. The goods or services being produced has a much lower opportunity cost compared to production or manufacturing from another country. For example, South Africa has a comparative advantage the United States in mining diamonds, based on their natural resources in comparison to the United States.…

    • 1004 Words
    • 5 Pages
    Good Essays
  • Satisfactory Essays

    Managerial Economics Quiz

    • 4814 Words
    • 20 Pages

    23. According to the theory of comparative advantage, a nation can gain from trade if it is not equally less…

    • 4814 Words
    • 20 Pages
    Satisfactory Essays
  • Satisfactory Essays

    1. Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade between individuals or countries? Is it absolute advantage or comparative advantage? Why?…

    • 634 Words
    • 3 Pages
    Satisfactory Essays
  • Good Essays

    Competitive advantage seeks to address some of the criticisms of comparative advantage. Michael Porter proposed the theory in 1985. Porter emphasizes productivity growth as the focus of national strategies. Competitive advantage rests on the notion that cheap labor is ubiquitous and natural resources are not necessary for a good economy. The other theory, comparative advantage, can lead countries to specialize in exporting primary goods and raw materials that trap countries in low-wage economies due to terms of trade. Competitive advantage attempts to correct for this issue by stressing maximizing scale economies in goods and services that garner premium prices (Stutz and Warf 2009).[1]…

    • 653 Words
    • 3 Pages
    Good Essays
  • Better Essays

    Comparative advantage has the power to evaluate the opportunity cost given up for the production of one product to the other as long as both countries can gain from a trade. In comparing corn and cheese, it showed the comparison of the benefit by reducing production on cheese and the quantity change in a bushel of corn. While both products can be produced in the same country, it was proven that corn had the comparative advantage over cheese. Reducing the labor from producing cheese to better the labor in producing one more bushel of corn had a higher productivity level at a lower opportunity…

    • 1096 Words
    • 5 Pages
    Better Essays
  • Good Essays

    Information system

    • 3772 Words
    • 32 Pages

    Country A has an absolute advantage in service goods, but a comparative advantage in manufactured goods…

    • 3772 Words
    • 32 Pages
    Good Essays
  • Satisfactory Essays

    Study Question

    • 832 Words
    • 4 Pages

    * A nation can develop a comparative advantage if it can supply its products more efficiently and at a lower price than it can supply other goods, compared with the outputs of other countries. China is profiting from its comparative advantage in producing textiles. On the other hand, ensuring that its people are well educated is another way a nation can develop a comparative advantage in skilled human resources. India offers the services of its educated teach workers at a lower wage.…

    • 832 Words
    • 4 Pages
    Satisfactory Essays
  • Satisfactory Essays

    report

    • 1720 Words
    • 7 Pages

    We live in an interdependent global community and the performance of our economy is increasingly shaped by policies of other nations. International trade is the voluntary exchange of goods and services by people of different nations. This lesson will explore the reasons for trade and explain absolute and comparative advantage.…

    • 1720 Words
    • 7 Pages
    Satisfactory Essays
  • Better Essays

    Econ 4130

    • 1917 Words
    • 8 Pages

    Comparative advantage is determined by the “price” of one good in terms of the other good within each country.…

    • 1917 Words
    • 8 Pages
    Better Essays
  • Powerful Essays

    The globalization of production has meant that one of the most enduring concepts in economics, David Ricardo’s, comparative advantage (Hollander, 1979), no longer means that countries may only specialize in the production of goods for which they have been historically deemed to be most suitable in terms of their endowment of economic resources and other factors that give them a relative comparative advantage in the production of these goods (Porter, 1990).…

    • 2038 Words
    • 9 Pages
    Powerful Essays
  • Satisfactory Essays

    Econ 201 Notes

    • 1473 Words
    • 6 Pages

    • absolute advantage is an ability to produce a particular good or service better than…

    • 1473 Words
    • 6 Pages
    Satisfactory Essays
  • Good Essays

    Macroeconomics

    • 774 Words
    • 4 Pages

    1. Distinguish between an absolute advantage and a comparative advantage. Cite an example of a country that has an absolute advantage and one with a comparative advantage.…

    • 774 Words
    • 4 Pages
    Good Essays