A comparison between Adam Smith's absolute and D. Ricardo's comparative advantage theory in international trade. "No matter what, you should always specialize"
11. Comparative Advantage
Spea e
No e :
A pe son has a ompa a
e ad an a e a
owe
os han an one e se.
p odu
n
some h n
he
Ha n a ompa a
e ad an a e s no
he same as be n
he bes
a , someone an be omp e e
uns
ed a do n some h n ,
ompa a
e ad an a e a do n
! How an ha happen?
an p odu e
a
e
a
some h n . In
s
ha e a
F s , e 's e some mo e o abu a . Someone who s he bes a do n some h n
s
sa d o ha e an abso u e ad an a e. M hae
o dan has an abso u e ad an a e a
bas e ba . Fo a
I now, M hae
o dan ma a so be he as es
p s
n he
wo d,
n h m an abso u e ad an a e a
p n , oo. S n e he's be e a
p n
han ou, an' he
pe mo e heap
han ou? Tha
s,
someone has an abso u e
ad an a e n some h n , doesn' he au oma a
ha e a ompa a e ad an a e n ?
The
p
I ,
se
se
answe
s no! I
o dan a es
me ou
om shoo n hoops o do a
h s own
n , he sa
es he a e n ome he ea ns
om en e a n n
ans o bas e ba .
ns ead, h s se e a
does he
p n , he se e a
es up an a e na e
e a a
ob—o pe haps a mu h owe sa a
p a n bas e ba . Tha
s, he
e a
s he owe - os
p s .
12. Comparative Advantage
1. A country should specialise in the production
of good or service in which it has lower
opportunity cost
2. It should import commodities which have a
higher opportunity cost of production
14. Case 1 : Not specializing
Sharing a 6 day work week among two.
Party
Paintings
Produced
Handicrafts
Produced
Total Profit
You
3
3
2250
Your
Neighbour
2
1
1100
Total Units produced in all
9
15. Case 2 : Specializing
And producing the product with comparative advantage
Party
Paintings
Produced
Handicrafts
Produced
Total Profit
You
6
0
2400
Your
Neighbour
0
4
1400
Total Units produced in all
10
16. Specializing is always good
And you can(should) specialize even if you are
good at everything