Comparative Advantage

Who first advocated for Absolute advantage and why?

Adam Smith- counter mercantilism

What is absolute advantage?

When countries can produce goods more efficient than another country- cheaper and more effectively

What does absolute advantage lead to?

Specialisation→ increase in global trade.

What can absolute advantage be influenced by?

1. Climate

2. Access to resources

3. Labour supply

What does absolute advantage suggest is possible?

Positive sum games

Who advocated for Comparative advantage?

David Ricardo

What is Comparative Advantage?

• A country producing a country relatively more efficiently than another country.

What does Paul Krugmann say about Comparative Advantage?

One of the most powerful yet counter-intuitive ideas in economics.

What is opportunity cost?

The loss of the potential gain when an alternative is chosen

What does Comparative advantage assume?

• Constant returns to scale- the time taken to create a product tends to reduce the more it is produced.

• Perfect factor mobility - in reality there is limited factor mobility.

• No transportation costs

• No barriers to trade.