Comparative advantage: Difference between revisions
Huckelberry (talk | contribs) |
Huckelberry (talk | contribs) add other names |
||
| Line 2: | Line 2: | ||
'''Comparative Advantage''' refers to the ability of an entity (individual, company, or country) to produce a [[good]] or service at a lower [[opportunity cost]] than another one. It is the ability to produce a product with an highest ''relative'' efficiency than one's trade partner, given all the other products that could be produced. It can be contrasted with [[Absolute Advantage]] which refers to the ability of one to produce a particular good or service at a lower absolute cost than another. | '''Comparative Advantage''' refers to the ability of an entity (individual, company, or country) to produce a [[good]] or service at a lower [[opportunity cost]] than another one. It is the ability to produce a product with an highest ''relative'' efficiency than one's trade partner, given all the other products that could be produced. It can be contrasted with [[Absolute Advantage]] which refers to the ability of one to produce a particular good or service at a lower absolute cost than another. | ||
'''Comparative Advantage''' is also know as '''comparative cost''', '''the law of association''' or the '''Ricardian Law of Association'''.<ref name="Mises_law_of_association"></ref> | |||
==Origins and Original Example== | ==Origins and Original Example== | ||
Revision as of 20:36, 7 February 2011
Comparative Advantage refers to the ability of an entity (individual, company, or country) to produce a good or service at a lower opportunity cost than another one. It is the ability to produce a product with an highest relative efficiency than one's trade partner, given all the other products that could be produced. It can be contrasted with Absolute Advantage which refers to the ability of one to produce a particular good or service at a lower absolute cost than another.
Comparative Advantage is also know as comparative cost, the law of association or the Ricardian Law of Association.[1]
Origins and Original Example
In Principles of Political Economy and Taxation, David Ricardo uses the example of wine production in Portugal and cloth production in England to illustrate comparative advantage. Unlike many contemporary examples, Ricardo uses labor to distinguish comparative advantage rather than quantity of goods (this distinction is novel, but not important). England can produce a certain quantity of cloth with 100 men for one year or a certain quantity of wine with 120 men in the same time. Portugal, on the other hand, may only require 80 men for one year to produce the same quantity of wine and 90 men for one year to produce the cloth. Portugal, in Richardo's example, has an absolute advantage: it makes both wine and cloth more efficiently than England. Yet, Ricardo concludes:
Though [Portugal] could make cloth with the labor of 90 men, she would import it from a country where it requires the labor of 100 men to produce it, because it would be advantageous to her rather to employ her capital in production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from cultivation of vines to the manufacture of cloth.[2]
If Portugal did not trade, she would need to produce the cloth locally, therefore devoting part of her capital to the manufacture of cloth, "which she would thus obtain probably inferior in quality as well as quantity."[2] The conclusion to be drawn is that the benefits of division of labor and specialization apply to international trade as well as to domestic trade.
Examples
In addressing the "paradox" where it is worthwhile for a country with absolute advantage to trade with a country who has absolute disadvantage (i.e., is more efficient in nothing), Paul Samuelson writes:
A traditional example used to illustrate this paradox of comparative advantage is the case of the best lawyer in town who is also the best typist in town. Will she not specialize in law and leave typing to a secretary? How can she afford to give up precious time from the legal field, where her comparative advantage is very great, to perform typing activities in which she is efficient but in which she lacks comparative advantage? Or look at it from the secretary's point of view. She is less efficient than the lawyer in both activities; but her relative disadvantage compared with the lawyer's is least in typing. Relatively speaking, the secretary has a comparative advantage in typing.[3]
The Meaning of Comparative Advantage
Ricardo's explication is a particular instance of the more universal law of association: all division of labor brings advantages. Demonstrated above, cooperation between the more able and the less able brings advantages to both. The law of association allows us to understand the progressive increase in human cooperation and the intensification of the division of labor.[1]
Assumptions
Comparative cost between countries is true under the assumption that capital and labor are immobile.[2] After his publication labor and capital increased in mobility, and countries with absolute advantages saw increases in migration and capital movements in the late 1800's. However towards the late 20th century the mobility of capital and migration fells. The mobility labor and capital can make it more advantageous for labor and capital to migrate in the cast of absolute advantage rather than stay and trade under conditions of comparative advantage.
References
- ↑ 1.0 1.1 Ludwig von Mises. VIII. Human Society, 4. The Ricardian Law of Association, Human Action, online version, referenced 2011-02-06.
- ↑ 2.0 2.1 2.2 David Ricardo Principles of Political Economy and Taxation, VII. On Foreign Trade, (Amherst, New York: Prometheus Books) 94-95
- ↑ Paul Samuelson, Economics (McGraw-Hill, 1973) p. 669
Links
- On the Principles of Political Economy and Taxation, by David Ricardo. Complete, fully-searchable text at the Library of Economics and Liberty.