Competitive versus Comparative Advantage

Competitive versus Comparative Advantage - -1Liliana C Melo...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
- 1 - Liliana C. Melo Professor Patrick Payne Principles of Management AMM 103 October 16, 2006 Absolute Advantage and Comparative Advantage According to the classic model of international trade introduced by David Ricardo (19th-century English economist) to explain the pattern and the gains from trade in terms of comparative advantage, it assumes a perfect competition and a single factor of production, labor, with constant requirements of labor per unit of output that differ across countries. The basis for trade in the Ricardian model is the differences in technology between countries. As a result, there are two different ways to describe technology differences: the first method, called absolute advantage , is the way most people understand technology differences; and the second method, called comparative advantage , is a much more difficult concept. Absolute advantage is the simplest measure of economic performance. It is the ability to produce a good at a lower cost, in terms of real resources than another country. Absolute Advantage is neither necessary nor sufficient for a country to export a good. In other words, a country has an absolute advantage economically over another, in a particular good, when it can produce that good more cheaply or it can produce more of the good than another country can, with the same amount of resources. In fact, absolute advantage appears when multiple products are being considering. For example, if the country “A” has an economic
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 4

Competitive versus Comparative Advantage - -1Liliana C Melo...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online