However, unlike absolute advantage, comparative advantage considers opportunity cost. Spell. The theory of comparative advantage thus provides a strong argument for free trade—and indeed for more of a laissez-faire attitude with respect to trade. He defined it as a state by which one nation was more efficient at producing a certain good than another. Absolute advantage describes the overall ability of a country to produce a good better and with fewer resources than another country. A similar concept, competitive advantage is typically used to model the competitiveness of firms and individuals. Comparative advantage is when a nation can produce a particular good at a lower opportunity cost than other nations. Theory of comparative advantage. Labour is the only productive factor. Comparative advantage can be said a theory that is based on the concept of relativity. Flashcards. Write. Some land grows corn better than other land. ADVERTISEMENTS: In this article we will discuss about the David Ricardo’s theory of comparative cost advantage. His theory concluded that a country could increase its income by specializing in certain products and services and selling these on the international market. After trade, the world market price (the price an international consumer must pay to purchase a good) of both goods will fall between the opportunity costs of both countries. The concept of comparative advantage was first formulated by economist David Ricardo as an explanation of the benefits of international trade for countries. PLAY. Theory of Absolute Advantage If one region can produce a commodity with less expense than another, and they exchange, then both should benefit. Terms in this set (9) Comparative advantage. Match. Gravity. This is a foundational concept in economics that is used to model international trade and the competitiveness of nations. It is used as the justification for WTO trade regulations. This economical insight […] STUDY. Businesses also may have a comparative advantage over their competitors … The following are illustrative … Based on this uncomplicated example, the supporting argument is simple: specialization and free exchange among nations yield higher real income for the participants. Comparative advantage assumes the following: Comparative Advantage means that one person or country is better at producing both goods. NNiko. The Ricardian Model: To explain his theory of comparative cost advantage, Ricardo constructed a two-country, two-commodity, but one-factor model with the following assumptions: 1. The law of comparative advantage was originally introduced by David Ricardo back in 1817. Created by. A country will specialise in that line of production in which it has a greater relative or comparative advantage […] David Ricardo believed that the international trade is governed by the comparative cost advantage rather than the absolute cost advantage. Similarly, the country’s imports will be of goods having relatively less comparative cost advantage or greater disadvantage. Comparative advantage not only affects the production decisions of trading nations, but it also affects the prices of the goods involved. If a company or country is relatively better at producing or making a particular product, it should make that product and should ignore anything else. The theory of comparative advantage dates back to the early 1800's, when author and economics expert David Ricardo used the term in his book, … The best theory is one that bounds the problem in simple assumptions that hold everything else constant, so we can see what happens if we change one variable. Test. In a nutshell, this is the law of comparative advantage. 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