Comparative Advantage Economic Relationship

A Comparative Advantage Economic Relationship is an economic relationship between two economic agents where one agent can produce a particular good or service at a lower marginal and opportunity cost over the other agent.

• Context:
  • It can result from differences in Factor Endowments or Technological Progress.
  • It can be a core concept in the theory of international trade, which explains how and why countries engage in trade even when one country's workers are more efficient at producing every good compared to workers in other countries.
  • It can suggest that economies can gain from trade if each specializes in producing goods for which it has a comparative advantage and trades for other goods.
  • It challenges the intuition that the most efficient producers should always produce all goods by showing that specialization and trade can benefit all parties.
  • It can be influenced by changes in technology, production processes, and the availability of resources.
  • ...
• Example(s):
  • David Ricardo's example of trade between Portugal and England, where despite Portugal's absolute advantage in producing both wine and cloth, England benefits from specializing in cloth due to its comparative advantage, and Portugal benefits from specializing in wine.
  • A modern software company (Country A) has highly skilled developers who can develop both front-end and back-end systems efficiently but has a comparative advantage in back-end development due to more specialized knowledge in that area. Meanwhile, another company (Country B) is more efficient in front-end development. Both companies can benefit from focusing on their comparative advantages and collaborating or trading services.
  • ...
• Counter-Example(s):
  • Absolute Advantage Economic Relationship, where an agent's productivity is superior in all production areas without considering opportunity costs.
  • The near-total displacement of horses in transportation by automobiles and trucks due to technological progress that renders previous advantages obsolete.
• See: Opportunity Cost, Labor Productivity, Absolute Advantage, Gains From Trade, Factor Endowments, Technological Progress, Economic Agent, Marginal Cost, Free Trade.

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References

2024

• (Wikipedia, 2024) ⇒ https://en.wikipedia.org/wiki/Comparative_advantage Retrieved:2024-3-22.
  • Comparative advantage in an economic model is the advantage over others in producing a particular good. A good can be produced at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comparative advantage describes the economic reality of the work gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress. 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 every single good than workers in other countries. He demonstrated that if two countries capable of producing two commodities engage in the free market (albeit with the assumption that the capital and labour do not move internationally ), then each country will increase its overall consumption by exporting the good for which it has a comparative advantage while importing the other good, provided that there exist differences in labor productivity between both countries. Widely regarded as one of the most powerful yet counter-intuitive insights in economics, Ricardo's theory implies that comparative advantage rather than absolute advantage is responsible for much of international trade.

2016

• (Wikipedia, 2016) ⇒ https://en.wikipedia.org/wiki/Comparative_advantage Retrieved:2016-8-23.
  • The theory of comparative advantage is an economic theory about the work gains from trade for individuals, firms, or nations that arise from differences in their factor endowments or technological progress. In an economic model, an agent has a comparative advantage over another in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. One does not compare the monetary costs of production or even the resource costs (labor needed per unit of output) of production. Instead, one must compare the opportunity costs of producing goods across countries. ...

2016

• (Wikipedia, 2016) ⇒ https://en.wikipedia.org/wiki/Comparative_advantage#Ricardo Retrieved:2016-8-23.
  • In a famous example, Ricardo considers a world economy consisting of two countries, Portugal and England, which produce two goods of identical quality. In Portugal, the a priori more efficient country, it is possible to produce wine and cloth with less labor than it would take to produce the same quantities in England. However, the relative costs of producing those two goods differ between the countries.

    In this illustration, England could commit 100 hours of labor to produce one unit of cloth, or produce [math]\displaystyle{ \frac 56 }[/math] units of wine. Meanwhile, in comparison, Portugal could commit 90 hours of labor to produce one unit of cloth, or produce [math]\displaystyle{ \frac 9 8 }[/math] units of wine. So, Portugal possesses an absolute advantage in producing cloth due to fewer labor hours, and England has a comparative advantage due to lower opportunity cost.

    In the absence of trade, England requires 220 hours of work to both produce and consume one unit each of cloth and wine while Portugal requires 170 hours of work to produce and consume the same quantities. England is more efficient at producing cloth than wine, and Portugal is more efficient at producing wine than cloth. So, if each country specializes in the good for which it has a comparative advantage, then the global production of both goods increases, for England can spend 220 labor hours to produce 2.2 units of cloth while Portugal can spend 170 hours to produce 2.125 units of wine. Moreover, if both countries specialize in the above manner and England trades a unit of its cloth for [math]\displaystyle{ \frac 5 6 }[/math] to [math]\displaystyle{ \frac 9 8 }[/math] units of Portugal's wine, then both countries can consume at least a unit each of cloth and wine, with 0 to 0.2 units of cloth and 0 to 0.125 units of wine remaining in each respective country to be consumed or exported. Consequently, both England and Portugal can consume more wine and cloth under free trade than in autarky.

1965

• (Simon, 1965) ⇒ Herbert A. Simon. (1965). “The Shape of Automation for Men and Management." Harper and Row.

1917

• (Ricardo, 1817) ⇒ David Ricardo. (1817). “Principles of Political Economy and Taxation." G. Bell and sons.

1815

• Robert Torrens. (1815). “Essay on the External Corn Trade."

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