THEORY OF COMPARATIVE ADVANTAGE

Theory of Comparative Advantage

Theory of Comparative Advantage

Theory formulated by David Ricardo in 1817 that explains the origin of the enormous profits generated by free trade beyond the explanation given by the theory of absolute advantage. According to the theory of comparative advantage, even if a country has no absolute advantage in the production of any good, you should specialize in the production of those goods for which s your handicap is less, and the country has absolute advantage in production all goods must specialize in the production of those whose benefit is greater. (O'Brien 2007, 190-195)

The theory of comparative advantage is an explanation of international trade based on the difference s of the costs of labour between countries. The competitive advantage of a company and comparative advantage (or absolute) of a country can converge or be in disagreement, which will strengthen or attenuate, respectively, of its potential. (Anderson 2006, 169-195)

Ricardo offers an explanation of international trade by comparative advantage, it exposes through a numerical example. Ricardo considers two nations, England and Portugal, which produce two commodities, cloth and wine. Production conditions, described by the unit production costs measured in units of work are different in both countries, so that the unit production costs are lower, for two properties in Portugal, as indicated the table below. (Maneschi 1998, 12-35)

As the capitalist world economy unfolded, different regions increasingly came to specialize in the production of different types of goods and services. In Europe during (and often before) the Industrial Revolution, for example, Britain became a major producer of textiles, ships, and iron; France produced silks and wine; Spain, Portugal, and Greece generated citrus, wine, and olive oil; Germany, by the end of the 19th century, was a major exporter of steel, ships, and chemicals; Czechs were selling glass and linens; Scandinavia sold furs and timber; and Iceland exported cod to the growing middle classes.

Within the United States, similarly, different places acquired advantages in some goods and not in others: The northeast was dominated by light industry, particularly textiles; the Manufacturing Belt became the centre of heavy industry; Appalachia developed a large coal industry to feed the furnaces of the industrial core; the South grew crops such as cotton and tobacco; the Midwest became the agricultural products behemoth of the world; and the Pacific Northwest was incorporated into the national division of labour based on the expanding timber and lumber industry. (Chang 1993, 131-157)

When regions, cities, or countries specialize in the production and export of some goods or services, they enjoy a comparative advantage. Although Adam Smith also used the idea to examine how firms specialized within a broader division of labour, this notion was spatialized by the famous 19th-century economist David Ricardo. Like all classical political economists, he assumed the labour theory of value (the value of goods reflects the amount of socially necessary labour time that goes into their production) and thus ignored demand. Ricardo concluded that nations will specialize in the production of a commodity ...