Trade - Trade/Investment/Finance David Ricardo: comparative...

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Trade/Investment/Finance David Ricardo: comparative advantage. Most states can produce everything they need. However, this is inefficient, as it might cost more to produce a certain good. Therefore, states should determine what type of goods they have a comparative advantage in, and then specialize in these goods. Comparative advantage deals with the what they can produce most efficiently within the domestic market itself. Ricardo uses the example of producing wine and cloth in England and Portugal. In his scenario, Portugal can produce both, and produce both more efficiently than England – in this sense, Portugal has an absolute advantage - however, Portugal has a comparative advantage in wine. Ricardo argues that Portugal should specialize in wine and get cloth from England – over time, Portugal will gain more through specialization due to reducing opportunity costs. If Portugal produces both, resources that could be used for wine go to producing cloth – this is a less efficient way to produce. Comparative advantage means that states can produce
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This note was uploaded on 11/25/2011 for the course POLISCI 1003 taught by Professor Olson during the Fall '11 term at GWU.

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