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Page 1: Comparative advantage

The comparative advantage

• The countries have to specialize in an activity even if they don’t have an absolute advantage, so as to get benefit from the international trade.

• Each country has to specialize in the sector in which they have a relative advantage, ie where the advantage of the country in term of relative productivity is the highest. Then, the country can trade its product from this sector.

Page 2: Comparative advantage

The comparative advantage

• England has no absolute advantage since Portugal has the absolute advantages in both sectors.

Hours/units PORTUGAL ENGLAND

Wain : X Litres

80 120

Clothes : Y metres

90 100

Absolute

advantage

Absolute

advantage

Page 3: Comparative advantage

The comparative advantageThe comparative advantage depends on the comparison in the productivity.

The productivity is the ratio between the ouput and the input.

Example : Portugal uses 80 people by year to produce x litres of wain. The productivity is X/80

Hours/units PORTUGAL ENGLAND

VIN: X litres 80 120

Clothes : Y metres

90 100

Page 4: Comparative advantage

The comparative advantageHouts/units PORTUGAL ENGLAND

Wain: X litres

80 120

Clothes : Y metres

90 100

X/80 X/120

Productivity comparison for the wain:

(X/120) / (X/80) = 0,66

X/90 X/100

Productivity comparison for clothes:

(X/100) / (X/90) = 0,9

Between these 2 sectors, England has the weakest disadvantage in the production of clothes.

Page 5: Comparative advantage

The comparative advantageHours/units PORTUGAL ENGLAND

Wain: X litres

80 120

CLOTHES : Y metres

90 100

Comparative advantage

Comparative advantage

Portugal will specialize in the production of wain and will product 2 X

England will specialize in the production of clothes and will product 2 Y

Portugal will trade 1 X against 1 Y produced by England

Page 6: Comparative advantage

The comparative advantageHours/units PORTUGAL ENGLAND

Wain: X litres

80 120

DRAP : Y metres

90 100

How many workers will be used after the specialization ?

0

160 0

200

The international specialization permits to each countries to save the work of a part of the labor force in getting the same production.

Gain in labor force

by year:

10(170 – 160)

20(220 – 200)


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