LAW OF COMPARATIVE ADVANTAGE

This research examines the law of comparative advantage, the origin of which generally is traced to David Ricardo. The law of comparative advantage is described and explained, with am emphasis on Ricardo's interpretation of the concept. The responses of other early-day economists to the law of comparative advantage are reviewed, as are current day perceptions of and attitudes toward the law of comparative advantage.

The Law of Comparative Advantage, and Ricardo's Interpretation of the Law of Comparative Advantage

To understand the law of comparative advantage, it is necessary to understand the differences between absolute advantage and comparative advantage when the concepts are considered within the context of international trade. Both absolute advantage and comparative advantage apply to specific products (goods primarily when the theory of comparative advantage was first formulated; goods and services in the current day).

A state is said to have an absolute advantage over another state in relation to a specific product when the first state is able to product a specific product in the quantities desired at a lower absolute cost than absolute cost that the second state can produce the same product in the quantities desired. Absolute advantage, therefore, is a straight-forward, easily understood concept.

The concept of comparative advantage considered within the context of international trade is not concerned only with the

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third state. Costs were the prime point of focus for Ricardo in relation to the theory of comparative advantage. Responses of Other Early-Day Economists Toward the Law of Comparative Advantage Ricardo had both supporters and opponents in relation to his stance on international trade. Ricardo was concerned about maintaining the economic viability of Great Britain. His approach to assuring continued economic viability was the promotion of international trade. This stance brought him into direct conflict with the latter day mercantilists. David Hume and Adam Smith had advanced theories that undercut the mercantilist arguments; however, the thought persisted in many quarters. Mercantilism, according to its proponents during its heyday, was a nation-building policy exercised through a series of control measures to protect a domestic economy from hostile foreign countries (Scott, 2002). A major goal of mercantilist policy was the maintenance of a positive balance of trade measurable in gold. The major tenets of mercantilist policy were as follows (Rempel, 2002): Bullionism (maintain a pnsitive balance nf precious metals); Balance of Trade (maintain a balance of exports over imports); Economic Self-Sufficiency; Tariffs (high

Category: Economics - L