David Ricardo a famous economist developed the theory of com

David Ricardo a famous economist, developed the theory of comparative advantage. Use the theory to answer the following: a. Differentiate between absolute advantage A comparative advantage. Why would a country Import an Item from another country that was less efficient at producing that Item? Why is trade beneficial for both countries?

Solution

a) Difference between absolute advantage & comparative advantage.

Ans- This theory given by Adamsmith in 1776. According this theory - a country has an absolute advantage in the production of a product when it is more effecient than any other country in producing it.

If two countries are specialize in production of different products( in which each has absolute advantage) And trade of each other ,both countries will have more of both products available to them for consumption.

Theory of comparative advantage- this theory was stablised by Devid Ricardo in 1817- according this theory- Even if a country has absolute advantage inproducing of two products over another country ,trading with that other country will still yield more output for both countries then if the more efficient producer did every thing for themselves.

The country with the absolute advantage in producing both products would still produce both products but less of the one they would trade for, allowing them to essentionally allocate more resources to producing the products that they are comparatively most effecient at producing.

b) So that they can get benefit of maximum production and full utilisation of resources ,this is called benefit of specialisation.As we increase production the cost will decrease ( according the law of returns to scale) So the country will use its full strenght for producing one product and try to minimize the cost and will import the othet product.

c) This type of trading is beneficial for both country in the following ways-

1. Efficient Use of Productive Factors- Both countries are able to utilise their full capacity of available resources. so that they will be able to produce the product at the minimum cost and get both benefit of high price.

2.It provide equality in both commdity and factor price.