COMPARATIVE ADVANTAGE

Comparative Advantage

Comparative Advantage

Things I have been putting in or thinking of putting in myself were: define absolute and comparative advantage. Obviously the significance of comparative advantage is that its not intuitive, so you got to define may be relative to absolute advantage to be clear of what you are talking about, and the key point about comparative advantage or points about comparative advantage based on opportunity cost. So I'm just going to show you that in just a minute.

Well my second point was that based on the opportunity cost, every country has absolute advantage. And the third point is you get gains from specialization from every trade. So they are kind of basic points to make on comparative advantage based trades. So if you understand those basic principles you going a long way towards showing and understanding comparative advantage and there are two principle theories of comparative advantage. One is the Ricardian theory of comparative advantage so its Ricardo's original demonstration of the principle of comparative advantage and the problem with this theory based on unexplained technological differences. So that is the principle feature of the Ricardian theory.

Different countries are going to have different levels of lake of productivity in different industries but Ricardo does not explain why. It is due to come technological factor that he does not explain. That does not make the Ricardian theory wrong because Ricardian theory is still older aged in trade theory so looking at recent development in patterns of imports and exports, the Ricardian principle is a very important thing that explains the heart of the much more recent changes. It is based on the technological differences between countries. Some international trade still based on the thing, now Ricardian theory did not explain he thing but it wasn't a wrong intuition if you like he did have an intuition that is true some of the time so, but as I say the weakness of the theory couldn't explain where it came from. The other theory is the Heckscher-Ohlin theory of comparative advantage and this is based on differences in patterns. So gain the Heckscher-Ohlin theory is intuitive and reasonable labour intensive countries specialised in labour intensive goods, land intensive countries in land intensive goods, capital intensive countries in capital intensive goods. It's also influences by technological differences which Heckscher-Ohlin doesn't really incorporate. So it's not really a complete theory of comparative advantage but is an important theory of comparative advantage because we can see patterns of trade which fit this explanation really rather well.

Need only think thing we have been discussing these tutorials trade surfaces in China and India based on comparative advantage they are relatively speaking labour abundant countries and they specialise in labour intensive goods that is changing over time but still explains why they export certain types of thing and import others.

So Heckscher-Ohlin is kind of staple so I just see that an example we read through in the in the lecture few weeks ago now so this if ...