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Comparative Advantage

1

The law or principle of comparative advantage holds that under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage.

Free trade is a trade policy that does not restrict imports or exports; it can also be understood as the free market idea applied to international trade.

Comparative Advantage Practice by Jacob Clifford

2

Comparative advantage is the economic reality describing the work gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress.

In economics a country's factor endowment is commonly understood as the amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing.

In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other.

Microeconomics Practice Problem - Comparative Advantage and Gains from Trade by jodiecongirl

3

In an economic model, agents have a comparative advantage over others 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.

In economics, marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit; that is, it is the cost of producing one more unit of a good.

In microeconomic theory, the opportunity cost, or alternative cost, of making a particular choice is the value of the most valuable choice out of those that were not taken.

In economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them.

4

One shouldn't compare the monetary costs of production or even the resource costs of production.

5

Instead, one must compare the opportunity costs of producing goods across countries.

6

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.

David Ricardo was a British political economist, one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill.

International trade is the exchange of capital, goods, and services across international borders or territories.

7

He demonstrated that if two countries capable of producing two commodities engage in the free market, 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.

A free market is a system in which the prices for goods and services are determined by the open market and consumers, in which the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority.

Workforce productivity is the amount of goods and services that a worker produces in a given amount of time.

8

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.

In economics, the principle of absolute advantage refers to the ability of a party to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.

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