Sample Essay on Comparative Advantage

Comparative Advantage

Comparative advantage is the economic theory regarding probable trade gains for firms, individuals or nations arising from their technological or factor endowments. An agent enjoys comparative advantage over a competitor if they are in a position to produce goods at low relative autarky price or opportunity cost which is the lowest marginal cost before trade.

The theory is a classical one and it was developed in 1817 by David Ricardo. It explains why some countries prefer to international trade regardless of the fact that workers in their countries are efficient in production of every good compared those in other countries. He further made the demonstration that when 2 countries with the capability of producing 2 commodities engage in free market then each country increase its consumption through export of the product it has an advantage over while they import the rest of the goods.

However, this is as long as there is exists a difference in productivity labor between the two countries. This theory is Image 2viewed as the most influential but counter-intuitive theory, it implies comparative advantage is what greatly influences international trade and not absolute advantage. Further, the theory holds that as long as one partner has the capability to produce products at a faster, cheaper and better pace, then they enjoy absolute advantage.

Nations fear to participate in free trade because they are aware of the fact that it is easy for them to be out-produced especially if the other countries have comparative advantage in varying areas which can boost imports rather than exports. This theory therefore stipulates countries are supposed to specialize in specific products for purposes of exporting and import the rest as long as they hold absolute advantage over such products.

This theory can best be illustrated through use of simple examples. For instance, if A is skilled at making cabinets and painting and they spend a day either building a cabinet or painting a picture they have comparative advantage over B who has the same skills but takes one day and a half to construct a cabinet or 3 days to paint. This example is also true in cases where trade is carried out at international level.

Britain offered its support to the theory by outsourcing food (Importing cheese, grains, meat and wine) and shifting focus on manufactured goods for purposes of exporting as such, making it the workshop of industrial revolution. In a nut shell, comparative advantage theory encourages nations to participate in free true trade and also pay attention to areas they have high advantage rather than bolstering weak industries through imposing tariffs that only serve the purpose of stifling production that could lead to overall wealth gain.

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Retreived From:

http://dictionary.reference.com/browse/Comparative%20Advantage

http://www.investopedia.com/ask/answers/09/law-comparative-advantage.asp

http://en.wikipedia.org/wiki/Comparative_advantage