|
Explaining the Theory of Comparative Advantage Using the Concept of Opportunity Cost Eduardo R. Zayas-Quiñones |
|||||||||||||||||||||
|
David Ricardo was a brilliant British economist and one the most important figures in the development of economic theory. Ricardo argued that there are advantages to a country in producing those goods that it can produce most efficiently - even if the country has absolute advantage in the production of all goods. Ricardo went on to say that a country should purchase those products that it produces with less efficiency from other countries even if it has an absolute advantage in producing these. To understand how this works, one would have to evaluate such an advantage in terms of resource opportunity cost. Following Ricardo's theory, suppose that a country had an absolute advantage in the production of widgets, gadgets and sprockets. Let's also suppose that each of these required varying resources to produce (See Table-1).
Because each country has a limited number of resources,
utilizing resources in producing those goods in which it has the most comparative advantage would result in increased
production. To me this almost sounds like achieving economy of scale in terms of available resources - let's take
a look at the math. Copyright © 2002-2006 Self-Published - All rights reserved. |
|
||||||||||||||||||||