gb15 - Comparative Advantage According to Adam Smiths...

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Comparative Advantage According to Adam Smith’s theory of absolute advantage, nations should only trade if one nation has an absolute advantage in one good, and the other nation has an absolute advantage in another good. Smith’s theory breaks down when one nation has an absolute advantage in both goods. If this is the case, should the countries necessarily refrain from trade? The answer is no. In the early 1800s, British economist David Ricardo proposed the theory of comparative advantage, which proposes that two countries can gain from trade even if one does not have an absolute advantage, as long as the countries specialize in producing the good for which they have a comparative advantage. A comparative advantage is the relative advantage that one nation enjoys over another nation, as opposed to an absolute advantage. Consider two countries—Russia and Luxembourg—that produce two products: vodka and eggs. Assume that both countries have the same level of productive resources. If Russia produced nothing but
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gb15 - Comparative Advantage According to Adam Smiths...

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