One Response

1. Raviishe

   November 22nd, 2009 at 2:06 pm

   1

   A country is said to have an absolute advantage in the production of a good or service if they are able to make it at a lower cost than another country. For example, if it costs $20 to make a chair in USA, but only $12 to make the same chair in China, then we would say that the Chinese economy has an absolute advantage in the production of that chair. Therefore we should allow people in China to make these chairs, as the finished product will be cheaper for consumers.
   If all international trade followed this theory, then production would increasingly be isolated in countries with low wages. Only highly specialised items would be able to be produced in countries with high wages. This would result in lower overall world production, which is clearly an undesirable outcome. As such, a different theory is needed.
   To understand the theory of comparative advantage, you first need to review the concept of opportunity cost. Opportunity cost is the value of the next best alternative – the one that you didn’t get. At the time we measured that cost in dollars, but we can also think of it in terms of products.
   Economics is a logical subject, just understand the theory and think logically.
   Hopefully, it helped.
   Take Care.