The theory or principle of comparative cost advantage states that countries are mutually beneficial in trade when they specialize in the production of goods that have the highest degree of comparative cost advantages and are exchanged for other commodities that have a comparative cost loss. This principle was inspired by David Ricardo in the 19th century and can help the nation to use its resources and make greater efforts to produce real goods through which they generate revenue through exports.
can produce the goods cheaper and import those that can only be produced at higher costs. The country has a comparative advantage to others in producing a product (not comparative, not absolute) with the lowest casual cost than others. Therefore, the real cost of producing a commodity (due to the lack of other goods) that it takes into account. Note that the principle of comparative cost advantage is based on the following assumptions:
1. There are only two countries
2. There are only two elements available with available resources
3. Free flow and mobility of production factors
4. No shipping cost
5. Constant costs apply
6. Technology is constant
7. Work is the only factor of production.
For the above assumptions, Brazil and the United States of America (USA) produce and consume rice and wheat. The preparatory manufacturing position is shown below:
Brazil-Rice (100 bags); Wheat (50 bags)
USA- Rice (50 bags); Wheat (100 bags)
TOtal- Rice (150 bags); Wheat (150 bags)
We now estimate the estimated cost of producing two commodities for the two nations.
Brazil, (rice) 50/100 = 1/2. ie 1 bag of rice = 1/2 bad wheat. (Wheat) 100/50 = 2. ie 1 bag of wheat = 2 bags of rice.
USA, (rice) 100/50 = 2nd ie 1 bag of rice = 2 bags of wheat. (Wheat) 50/100 = 1/2, 1 bag of wheat = 1/2 bag of rice
In the law of comparative cost advantage, Brazil specializes in rice cultivation while the US specializes in the cultivation of wheat. Thus, using all the available resources, both rice and wheat production would have 50 bottlenecks:
Brazilian rice (200), wheat (0)
USA, Rice (0); wheat (200)
Whole rice (200); wheat (200), which is more than Rice's first analysis (150); Wheat (150)
The plus of this principle is that: the growth of the world's total production; better and more efficient use of resources, increased consumption of goods, such as rice and wheat, innovations, inventiveness and better technology; an increase in interdependence between the nations of the world and a reduction in mass production.
Finally, the comparative cost advantage has limitations: there are more than two commodities in the world and because of the presence of many goods, this principle is not feasible; there are more than two countries in the world, all countries in the world do not have the same efficiency as the workforce, not to mention other factors of production; there is no free transport around the world; there are also production factors such as labor, such as capital, land and entrepreneur; everywhere in the world can never equal the labor force; world production costs can never be constant, and trade inequality between the world's countries also makes the principle difficult. So in practice this principle is simply abstract.
Source by sbobet