Tuesday, July 23, 2019
Sunday, July 21, 2019
Absolute Advantage Vs Comparative Advantage
Unit-5: International Economics
q International
Trade: Basic concepts and analytical tools
q Theories of International Trade
q International
Trade under imperfect competition
q Balance of
Payments: Composition, Equilibrium and Disequilibrium and Adjustment Mechanisms
q Exchange Rate:
Concepts and Theories
q Foreign
Exchange Market and Arbitrage
q Gains from
Trade, Terms of Trade, Trade Multiplier
q Tariff and
Non-Tariff Barriers to trade; Dumping
q GATT, WTO and
Regional Trade Blocks; Trade Policy Issues
q IMF & World Bank
Absolute
Advantage
vs
Comparative Advantage
vs
Comparative Advantage
Absolute Advantage Theory
•
Given By Adam Smith
•
In 1776
•
When two nations have an absolute difference
in the cost of production of commodities
•
This can be explained with the help of an
example:
|
India
|
China
|
|
|
Toy Car
|
5
|
10
|
|
Computer
|
10
|
6
|
Here,
5 toy cars are produced with 1 hour of Labour
10 toy
cars are produced with 1 hour of Labour
10 computers are produced with 1 hour of Labour
6 computers are produced with 1 hour of Labour
It shows that China has an absolute advantage in
production of Toy car and India has an absolute advantage in the production of
Computer
Comparative
Advantage
•
By Ricardo
•
in 1817
•
Each country will specialize in the
production of those commodities in which it has the greatest advantage or least
comparative disadvantage.
•
Basis of trade is “Difference in Labour
productivity”
•
This is explained with the help of an
example below:
|
Nation
|
India
|
China
|
|
Computer
|
12
|
8
|
|
Toy car
|
10
|
9
|
Here, 12 computers are produced in one day
9 toy cars are produced
in one day
This example shows that India has a comparative advantage in the production of Computer.
And China has a comparative
advantage in the production of Toy car.
MCQs
1)
Free trade is based on the principle
of:
(a)
Comparative scale
(b)
Comparative advantage
(c)
Economics of advantage
(d)
Production possibility advantage
2) Theory of absolute
advantage was propounded by:
(a)
Marshall
(b)
Ricardo
(c)
Adam Smith
(d)
Malthus
3) According to the principle
of absolute advantage, mutually beneficial trade between countries requires:
(a)
Pure competition in all trading countries
(b)
Producing those goods a nation can produce
at the lowest cost and exchanging its surpluses with other nation
(c)
Pre-trade costs to be symmetric
(d)
None of the above
4) David Ricardo’s law of
comparative advantage states that:
(a)
Mutually beneficial trade can occur
between nations, if pre-trade opportunity costs are different
(b)
Two countries can gain from trade only
when they have different tastes and preferences
(c)
Trade benefits a country if it has
comparative advantage in all goods and services
(d)
None of the above
ANSWERS
1)
b
2)
c
3)
b
4)
a
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