Comparative advantage is the ability to produce a good or service for a low opportunity cost compared to other countries of a country.
Opportunity cost measures a business band. The nation with comparative profit makes trade-closes meaningful. This means that the benefits of purchasing good or service causes disadvantage. Country may not be best in producing something, but good or low opportunities in service to import other countries.
This economic theory was developed by David Ricardo. It was originally applied to international trade, but can be applied to any level of business.
Definition and example of comparative profit
Comparative advantage is what you do while least while leaving. For example, if you are a great plumber and a great midwife, then your comparative benefit is plumbing.
This is because you will earn more money as a plumber because one hour of children cost much less than the cost of services, which you reduce than one hour of plumbing. Opportunity cost On the other hand, the child is to take care of, high. Every hour you spend the baby care, one hour lost revenue that you can take to a plumbing job.
If you are better than all the rest in the neighborhood in both plumbing and child handling, then you have a complete benefit in both areas. But plumbing is your comparative benefit. This is because you only leave the job of low cost children to pursue your well -paid plumbing career.
How comparative benefits work
International trade, countries usually have comparative benefits in various industries and for various reasons. They can be related to natural resources, workers, government investment or other factors. Countries then trade on the basis of these benefits.
Comparative benefits in oil
For example, oil producing nations have comparative benefits in chemicals. Their locally produced oil provides a cheaper source of materials for chemicals when compared to countries without it. A lot of raw materials are produced in the oil distillery process. As a result, Saudi Arabia, Kuwait and Mexico became competitive with American chemical production firms in the early 1980s. Their chemicals are cheap, which reduces the cost of their opportunity.
Comparative advantage in labor cost
Another example is call centers in India. American companies buy this service as it is cheaper than the call center detection in the US. Some companies may have customers who experience misunderstandings due to language obstacles when they are talking with representatives of Indian call centers. However, call centers provide the service cheaply to make them trade for businesses hiring.
Comparative benefits in america
A factor in America’s comparative benefits is its huge land bound by two oceans. It also has a lot of fresh water, arable land and available oil. American businesses benefit from safety from cheap natural resources and land invasion. Most important, the country has a diverse population with a common language and national laws. The diverse population provides a comprehensive testing market for new products. This helped the United States to produce consumer products.
Diversity also helped the United States become a global leader in banking, aerospace, defense equipment and technology. Silicon Valley used the power of diversity to become a leader in innovative thinking. Those combined benefits created the power of the American economy.
Comment
investment in Human capital It is important to maintain comparative benefits in knowledge-based global economy.
In the past, comparative benefits were more in goods and rarely in services. This is because it is easy to export products. However, telecom technologies such as Internet are making services easier to export services. Those services include call centers, banking and entertainment.
Who developed the principle of comparative profit?
The concept of comparative advantage was developed by economist David Ricardo in the early 1800s. He argued that a country increases its economic growth by focusing on industry, which has the most important comparative benefit.
For example, at that time, England was able to manufacture cheap clothes. Portugal had the right position to make cheap liquor. As a result, Ricardo predicted that England would stop making liquor and stop making Portugal cloth. Instead, he suggested, they would trade with each other for the product that they were less efficient in production.
he was right. England earned more money by trading their clothes for Portugal’s liquor, and vice versa. For this, England will have to spend a lot so that all alcohol needs to be needed because it lacked the right climate to grow grapes efficiently. On the other hand, Portugal did not have the construction capacity to make cheap clothes. The two countries financially advant that they could produce the most efficiently and what they could not produce easily could import.
Ricardo developed its approach to combat trade restrictions on imported wheat in England. He argued that there is no point in restricting low -cost and high quality wheat from countries with correct climate and soil conditions. England will get more value Export product It required skilled labor and machinery. It can get more wheat in business as it can grow on its own.
David Ricardo started as a successful stockbroker, which is $ 100 million in today’s dollar. After reading Adam Smith’s “The Wealth of Nations”, he became an economist. He said that in 1809, money supply in England created inflation. This theory is known as “.Encounter,
Ricardo also developed a law to reduce marginal returns. It is one of the required concepts in microeconomics. It states that there is a point in production where increased production is no longer worth additional input in raw materials.
How comparative benefits affect international trade
The principle of comparative gain argues that Trade protectionism Does not work over time. Political leaders are always under pressure from their local components to protect jobs by increasing jobs. TariffBut this is only a temporary fix.
In the long run, business protectionism damages the country’s competition because it is not efficient. This allows the country to ruin resources on unsuccessful industries. It also forces consumers to pay high prices to buy household goods.
Comparative benefits vs full profit
Full benefit is anything that a country does more efficiently than other countries. The nation which is blessed with the abundance of farm, fresh water and oil reserves, has a full benefit in agriculture, gasoline and petrochemicals.
Just because a country has a complete advantage in an industry, however, this does not mean that it will be a comparative benefit. It depends on what the trading opportunity cost is. Suppose his neighbor has no oil, but there are many fields and fresh water. Neighbors are ready to trade a lot of food in exchange for oil. Now the first country has comparative benefits in oil. It can get more food from your neighbor by trading for oil, as it can produce on its own.
Comparative benefits vs. competitive benefits
The competitive advantage is what a country, business or person does that provides better value to consumers than its rivals. Three strategies companies use to get competitive benefits. First, they can be low -cost provider. Second, they could provide a better product or service. Third, they could focus on a type of customer.
Competitive advantage is one that makes you more attractive to consumers than your rivals. For example, you may be highly in demand to provide plumbing services, even if other plumbers are available which are only good or better. This can happen because you charge less. This gives you a competitive advantage.
How to calculate comparative benefits
To find comparative benefits for a specific good or service, compare the opportunity cost of the same good or service production between two businesses or countries.
| Factory A | Factory B | |
|---|---|---|
| Table | 300 | 900 |
| Chairs | 1,000 | 1,005 |
Factory A and Factory B produces both chairs and tables. In a week, Factory A can produce either 300 tables or 1,000 chairs. The same week, the factory B can produce B900 tables or 1,005 chairs.
Factory B has a complete advantage in both chairs and tables as it can produce more at the same time. However, it has comparative advantage in the table as it can produce three times the number of tables as factory A for the cost of the same time. Factory B should make its resources and focus on the trading table, making the factory A produce chairs.
key takeaways
- Countries with comparative profit will focus on their capital, labor and natural resources on the production of goods and services with low opportunity costs and high profit margins.
- 19th century economist David Ricardo developed a concept of comparative advantage to eliminate tariffs on wheat imports in England.
- One country can have a complete or competitive advantage over another, but it will often choose to focus on the production of goods where it has comparative advantage.
- Business protectionism molds disabled industries, which goes against the concept of comparative gains.
Frequently asked questions (FAQs)
How does comparative benefits benefit developing countries?
Developing countries have very low labor costs than industrial nations, which gives them comparative benefits in many labor-intensive industries, such as construction and manufacturing.
How does comparative benefits benefit the United States?
The US has comparative advantage in the production of many goods and services, especially when it comes in financial markets. Where it does not have comparative advantage, it is benefited through benefits by paying less for goods and services, as it will cost them to produce domesticly.
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