it can be argued that world output would increase when the principle of comparative advantage is applied by countries to determine what goods and services they should specialize in producing. Comparative advantage is a term associated with 19th Century English economist David Ricardo.
Ricardo considered what goods and services countries should produce, and suggested that they should specialize by allocating their scarce resources to produce goods and services for which they have a comparative cost advantage. There are two types of cost advantage – absolute, and comparative.
Absolute advantage means being more productive or cost-efficient than another country whereas it relates to how much productive or cost efficient one country is than another.
Example In order to understand how the concept of comparative advantage might be applied to the real world, we can consider the simple example of two countries producing only two goods – motor cars and commercial trucks
Using all its resources, country A can produce 30m cars or 6m trucks, and country B can produce 35m cars or 21m trucks. This can be summarized in a table.
In this case, country B has the absolute advantage in producing both products, but it has a comparative advantage in trucks because it is relatively better at producing them. Country B is 3.5 times better at trucks, and only 1.17 times better at cars.
Comparative advantage = least opportunity cost.
Opportunity cost for making cars for country A= 6/30=1/5
Opportunity cost for making cars for country B= 21/35=3/5
Opportunity cost for making trucks for country A= 30/6=5
Opportunity cost for making trucks for country B= 35/21=5/3
Least opportunity cost for making cars is country A & thus it has a comparative advantage in cars.
Least opportunity cost for making trucks is country B & thus it has a comparative advantage in trucks.
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