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Comparative Disadvantages: Definition Of Comparative Advantage

1180 Words5 Pages

DEFINITION of 'Comparative Advantage' The reason of a countries engage in the international trade even one country more efficient to produce every single particular goods than other country. The theory of Absolute Advantage founded by Adam Smith on 1776 to describe an entity is the best at doing something than other competitors, in other words, the productivity of each unit of labor is the highest by using the same resources level. Ricardian Model Comparative advantage is an essential concept in International trade which created by David Ricardo on 1817 as the ‘Ricardian Model’ <Ref. On the Principles of Political Economy and Taxation>, it is different from concept of Absolute Advantage easy to confused. In Ricardian Model, the labor productivity is the only …show more content…

If a country intensively use their abundance resource and cheap factors to specialize production for a product domestically and export it to foreign, meanwhile, sacrifices production for the goods have relative scarcity of resource which could import from foreign country. Eventually create trade in order to better off each other & gain from trade. Assumption taken is similar to Ricardian models included two goods, two nations, and fully competition market. The two factors labor and lands can substitute each other but not perfect substitution. The substitute process may affect and lower down the productivity. It could represented by curved PPF, and factor intensive ratio -- real wages / renting rate ratio. Relative product price is significant and affect the wages level, and explicitly affect the wages / renting ratio. The country will subject to factor intensive ratio to determine the substitution in order to max the production value and predict the trade

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