Question

Using examples, discuss and illustrate the keystone of international trade, the theory of comparative advantage.

Answer 1

David Ricardo, introduced the theory of comparative advantage which focuses on the relative differences in production of two items. If country A had the absolute advantage in the production of two goods , trade and specialisation between 2 countries could still occur because there can be comparative advantage in the production of one good for the other country.

Example: If a lawyer charges $200 an hour for legal services. The same lawyer can type faster than the administrative assistant which gets $50 an hour.They don't do both jobs because if the lawyer does so, for each hour they type , they sacrifice $150 had they been administering legal advise. By specialisibg in one, each person can maximize their overall productivity.