Friday 10/06/2011

Trade and Integration

An Explanation of Absolute and Comparative Advantage

Friday 10/06/2011

An Introduction
In the early 1800s David Ricardo noted that if every country in the world specialised in producing the good or service which they were best at making, then everyone would benefit from greater output from the same number of scarce resources. David Ricardos work applying specialisation led to the theory of comparative advantage being developed.

Friday 10/06/2011

Comparative Advantage
We already know that there are numerous benefits to be gained from international trade.
Increased competition Lower prices Increased efficiency (both allocative and productive)

The theory of comparative advantage would add another benefit from world trade, namely that everyone will benefit from countries specialising and then freely trading whatever surplus which they have of a particular good or service. It is comparative advantage which helps countries to decide what to specialise in.

Friday 10/06/2011

Absolute Advantage
Absolute advantage is where a country produces more than another country from its scarce resources. E.g. Germany produces 70 units of cars and 40 units of steel and France produces 30 units of cars and 45 units of steel. Which country has absolute advantage? Germany