Short Essay on Comparative advantage and Trade

The principle of free trade is based on the law of comparative advantage. The law of comparative advantage states that if countries specialise in producing what they have a relative advantage (lower occasion cost) then there will be a net gain to society. This essay is an explanation of the difference between absolute and comparative advantage.

Absolute Advantage:

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This occurs when one country can produce a good with fewer resources than another. For example if France can produce wine with less resources than the Uk, then France should specialise in the yield of wine.

· If the Uk can produce wheat with less resources then it will have an absolute advantage.

· Therefore Uk will specialise in wheat, and France in wine.

· Production will be maximised by each country specializing and then trading, both countries will gain

Comparative Advantage

A country has a comparative advantage over an additional one in the yield of a good if it can produce it at a lower occasion cost. I.e. If it has to forego less of other goods in order to produce it.

· Thus trade between countries can still be beneficial even if one country can produce all goods with less resources. For example a developed country may have an absolute advantage in both computers and cloth.

· However the developed country has a comparative advantage in computers because only a small number of cloth has to be foregone.

· The developing country has a higher occasion cost for computers because it would have to forego a lot of cloth to produce a computer.

Benefits of Trade

1. The law of comparative advantage states that trade can advantage all countries if they specialise in the goods in which they have a comparative advantage. As a corollary consumption increases because of specialisation.

2. Specialisation will corollary in economies of scale . Economies of scale occur when increased yield leads to lower midpoint costs of production. This is a major highlight of globalisation and the specialisation it enables.

Short Essay on Comparative advantage and Trade

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