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• Comparative Advantage
https://store.theartofservice.com/the-comparative-advantage-toolkit.html
Protectionism - Criticisms of the Theory of Comparative Advantage as a basis for trade policy
1 According to Britannica.com, The theory of comparative advantage provides a strong
argument in favour of free trade and specialization among countries. The issue
becomes much more complex, however, as the theory’s simplifying assumptions—a single
factor of production, a given stock of resources, full employment, and a balanced exchange of
goods—are replaced by more-realistic parameters.
http://www.britannica.com/EBchecked/topic/129613/comparative-advantage
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Protectionism - Criticisms of the Theory of Comparative Advantage as a basis for trade policy
1 Herman Daly, a leading voice in the discipline of ecological economics, emphasizes that although Ricardo's theory of comparative
advantage is one of the most elegant theories in economics, its application to the present day is illogical: Free capital mobility
totally undercuts Ricardo's comparative advantage argument for free trade in goods,
because that argument is explicitly and essentially premised on capital (and other factors) being immobile between nations
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Comparative advantage
1 In economics, 'comparative advantage' refers to the ability of a party to produce a particular
good or service at a lower Marginal cost|marginal and opportunity cost over another. Even if one country is more efficient in the
production of all goods (absolute advantage in all goods) than the other, both countries will still gain by trading with each other, as long as they
have different relative efficiencies.'Baumol, William J. and Alan S. Binder, 'Economics:
Principles and Policy, . 2009.
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Comparative advantage
1 The more-efficient country has a comparative advantage in shoes, so it can gain in efficiency by moving
some workers from shirt-production to shoe-production and trading some
shoes for shirts
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Comparative advantage - Origins of the theory
1 The conclusion drawn is that each country can gain by specializing in the good where it has comparative
advantage, and trading that good for the other.
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Comparative advantage - Modern Theories
1 Ricardian theory was formulated in Jones' 1961 paper,Richard Jones, Comparative Advantage and the
Theory Tariffs: A Multi-country, Multi-commodity Model, Review of
Economic Studies, Nomber 77, pages 161-175, June 1961
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Comparative advantage - Effect of trade costs
1 Trade costs, particularly transportation, reduce and may
eliminate the benefits from trade, including comparative advantage. Paul Krugman gives the following example., Paul Krugman, February
21, 2010
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Comparative advantage - Effect of trade costs
1 Krugman proceeds to argue more speculatively that changes in the cost of
trade (particularly transportation) relative to the cost of production may be a factor in changes in global patterns of trade; if trade costs decrease, such as
with the advent of steam-powered shipping, trade should be expected to
increase, as more comparative advantages in production can be realized
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Comparative advantage - Effects on the economy
1 Conditions that maximize comparative advantage do not automatically resolve trade deficits. In fact, many real world
examples where comparative advantage is attainable may require a trade deficit. For example, the amount of goods produced
can be maximized, yet it may involve a net transfer of wealth from one country to the
other, often because economic agents have widely different rates of saving.
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Comparative advantage - Effects on the economy
1 As the markets change over time, the ratio of goods produced by one country versus another variously changes while maintaining the
benefits of comparative advantage. This can cause national currencies to
accumulate into bank deposits in foreign countries where a separate
currency is used.
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Comparative advantage - Development economics
1 Further, they argue that comparative advantage, as stated, is a static
theory – it does not account for the possibility of advantage changing through investment or economic development, and thus does not provide guidance for long-term
economic development.
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Comparative advantage - Development economics
1 Today trade policy tends to focus more on competitive advantage as opposed to
comparative advantage
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Comparative advantage - Free mobility of capital in a globalized world
1 Some scholars, notably Herman Daly, an American ecological economist
and professor at the School of Public Policy of the University of Maryland,
have voiced concern over the applicability of Ricardo's theory of
comparative advantage in light of a perceived increase in the mobility of
capital:
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Comparative advantage - Free mobility of capital in a globalized world
1 International trade (governed by comparative advantage) becomes, with the introduction of free capital
mobility, interregional trade (governed by absolute advantage).
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Comparative advantage - Free mobility of capital in a globalized world
1 The moment the model expands from one good to multiple goods, the absolute may turn to a comparative
advantage
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Comparative advantage - Criticism
1 For example, according to the comparative advantage principle,
developing countries with a comparative advantage in agriculture
should continue to specialize in agriculture and import high-
technology widgets from developed countries with a comparative advantage in high technology
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David Ricardo - Comparative advantage
1 He argued there is mutual benefit from international trade even if one party is more competitive in every
possible area than its trading counterpart and that a nation should concentrate on sectors where it had
a comparative advantage while engaging in international trade in order to acquire those products in
which it does not have a comparative advantage.
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David Ricardo - Comparative advantage
1 Ricardo's theory of comparative advantage attempted to prove, using
a simple numerical example, that international trade is always
beneficial.Ricardo, David (1817) On the Principles of Political Economy
and Taxation
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Ricardian economics - Comparative advantage
1 With perfect competition and undistorted markets, countries tend to export goods in which they have a
comparative advantage.
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Ricardian economics - Comparative advantage
1 According to The Fortune Encyclopedia of Economics, Ricardo's idea of comparative advantage is the
main basis for most economists' belief in free trade today (827).
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Capital mobility - Capital mobility and comparative advantage
1 Capital mobility and the competitive drive for the highest return on
investment would give all countries identical relative abundances for new investment, eliminating comparative
advantage and trade.
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Capital mobility - Capital mobility and comparative advantage
1 Other conceptions of comparative advantage are sound in all instances where the factors of production not homogenous between the parties notwithstanding mobility factors.
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Capital mobility - Capital mobility and comparative advantage
1 Given the liberalization of capital flows under free trade agreements of
the 1990s, the condition of capital immobility no longer holds. David Korten argues that the theory of
comparative advantage is replaced by that of downward levelling.
However, capital immobility is only one route to comparative advantage,
useful to basic models, but not essential to it.
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Capital mobility - Capital mobility and comparative advantage
1 Basic models assuming capital immobility were convenient and not essential to the principle. Although greater capital mobility is likely to reduce comparative advantage,
barriers to capital flows are not the only way to derive it.
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Capital mobility - Capital mobility and comparative advantage
1 * Early qualitative property|qualitative descriptions of the
principle were based on the greater ease of producing different
commodity|commodities in one country than another, and not on capital mobility. The comparative
advantage of France over Iceland in wine production is not based on
capital immobility.https://store.theartofservice.com/the-comparative-advantage-toolkit.html
Capital mobility - Capital mobility and comparative advantage
1 * Comparative advantage can be derived from more complicated
models including capital mobility (i.e., international borrowing, lending, and labor movement) and often posit movement of capital as analogous to
the movement of goods.
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