the concept of comparative advantage was first formulated by economist David Ric
ID: 1127498 • Letter: T
Question
the concept of comparative advantage was first formulated by economist David Ricardo as an explanation of the benefits of international trade for countries. His theory concluded that a country could increase its income by specializing in certain products and services and selling these on the international market.
a. Would such a policy imply that the country should never diversify into new products?
b. Can a country know with certainty its comparative advantage without experimenting with the production of new goods?
c. What are the implications for national security of specialization?
Explanation / Answer
David Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries engage in international trade even when one country's workers are more efficient at producing everysingle good than workers in other countries.
according to Ricardo
"If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished ... but only left to find out the way in which it can be employed with the greatest advantage.
ans to the first part
see this policy states that country should focus on their strength (the goods that they can produce well in short labour costs) and not diversify into new products.
ans to part b
yes ,
Ricardo argued that a country shouldn't specialize in those goods that it can produce at a higher total level, but in those goods that it can produce with a lower opportunity costs.
Consider a hypothetical situation where the U.S. can either produce 100 televisions or 50 cars. China can produce 50 televisions or 10 cars. The U.S. is better at producing both in an absolute sense, but China is better at producing televisions because it only has to give up one-fifth of a car to make one television; the U.S. has to give up one-half of a car to make a television. Conversely, the U.S. only has to trade two televisions to make a car, while China has to forgo five televisions to make a car.
This example highlights why there is almost always an economic incentive for two entities, including whole countries, to engage in trade. This is especially important for less-developed countries, who are not shut out of international markets because they lack the superior technology and capital infrastructure of wealthy nations.
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