Submitted by: Submitted by filjin
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Category: Business and Industry
Date Submitted: 04/19/2011 06:47 PM
Concept of Comparative Advantage
Comparative advantage refers to the ability of a certain country, individual, company or a
region to produce a good or product at a lower opportunity cost and in a more efficient way than
the competition. (O’Sullivan and Sheffrin, 2003). This economic concept put forth by David
Ricardo. He further explained that this advantage should not be a hindrance in the free flow of
trade. Even if one entity does not have an absolute advantage in the production of good, but does
have a cost benefit of producing the good relative to its competitor trade will still be beneficial to
both parties through specialization in producing and exporting products based on their
endowment of resources.
England and Portugal
To illustrate the benefits of specialization and trade David Ricardo used Portugal and
England and their production of wine and cloth as an example. Ricardo assumed that the two
countries, Portugal and England, could produce two goods, cloth and wine, using a single factor of
production: labor. Each country has a fixed amount of labor, which is mobile between occupations within
a country but not between countries. Ricardo assumed that England could produce 1 unit of cloth with
100 person-years of labor and 1 unit of wine with 120 person-years of labor. Portugal could produce 1
unit of cloth with 90 person-years of labor and 1 unit of wine with 80 person-years of labor, so that
Portugal had an absolute advantage in producing each good. Suppose that, without trade, each country
would produce and consume one unit of each good so that total output would be two units of cloth and
two of wine. If England devoted all of its 220 person-years of labor to producing cloth, it could produce
2.2 units of cloth. If Portugal devoted all of its 170 person-years of labor to producing wine, it could
produce 2.125 units of wine (Sharpe, 2005).
With England specializing in cloth...