Divya-theory Of Comparative Advantage

THEORY OF COMPARATIVE ADVANTAGE The Theory was propounded by David Ricardo in 1817 comparative advantage refers to the ability of a person or a country to produce a particular good at a lower marginal cost and opportunity cost than another person or country. It is the ability to produce a product most efficiently

According to Comparative Advantage theory Trade is possible as long as the country experiencing the disadvantage is not equally less efficient in producing all the products

Example

A

Labour hours required 1 Unit of steel 1 unit of cement 5 10

B

15

20

Opportunity Cost – the quantity of a product foregone to produce one additional unit of another product Opportunity Cost Steel

Cement

A

60/120= 0.50

120/60=2.00

B

30/40=0.75

40/30=1.33

Assumption for the theory of Comparative Advantage • • • • •

Prefect Competition Productivity of labour Full employment Mobility Technology