What is the main concept of comparative advantage?
Comparative Advantage: The ability of an actor to produce a good or service for a lower opportunity cost than a competitor.
Why is Ricardo’s explanation of the law of comparative advantage unacceptable what acceptable theory can be used to explain the law?
David Ricardo’s explanation of the law of comparative advantage was based on the labor theory of value, which is not an acceptable theory of value. The law of comparative advantage can be based off the opportunity cost theory which is acceptable by the theory of value.
What are the assumptions of absolute advantage theory?
The Absolute Advantage Theory assumed that only bilateral trade could take place between nations and only in two commodities that are to be exchanged. Such an assumption was significantly challenged when the trade, as well as the needs of nations, started increasing.
How Ricardo theories contribute in the development of economics?
Ricardo like Smith realises that a high rate of capital accumulation is necessary for economic growth. He considers profits as the primary source of accumulation, although among the secondary sources he includes rent and wages (when they are high enough to generate a surplus over subsistence).
What is the difference between comparative and competitive advantage?
The key distinction is that while comparative advantage seeks to explain patterns and gains from trade, the competitive advantage explains which firms, industries or nations will be winners in a global competition and how they can position for it.
What are the four main sources of comparative advantage?
What are the Sources of Comparative Advantage? Comparative advantage is determined by a country’s resources, that is the land, labour, capital and enterprise.
Which of the following describes Ricardo’s comparative cost doctrine?
The principle of comparative cost states that (a) international trade takes place between two countries when the ratios of comparative cost of producing goods differ, and (b) each country would specialise in producing that commodity in which it has a comparative advantage.
How does Ricardian theory differ from classical theory of international trade?
The main cause of the international trade is the difference in factor supplies between the countries. Each country differs in factor endowments i.e. in their abundance or scarcity. In Ricardian theory, difference in factor (labour) efficiency is recognized but difference in factor supply is ignored.
What are the limitations of absolute advantage theory?
There are, however, many disadvantages to the theory of absolute advantage. One is that the theory relies on truly free trade between nations. In reality, this is rare as tariffs, quotas, and other factors add friction to trade between regions.
What are the limitations of comparative advantage?
Limitations of comparative advantage theory Transport costs and tariffs and exchange rates may change the relative prices of goods and may distort comparative advantages. Imperfect competition may lead to prices being different to opportunity cost ratios.