An Basic Theory Of Comparative Advantage Essay

1881 Words Nov 18th, 2014 8 Pages
Trade Liberalization or also known as free trade is one of the mechanisms in International Trade . Free trade occurs when the government put no barriers in order to restrict the flow of goods and services between trading nations. The country can freely import and export their products to other countries without any restriction and barrier.

“There are two types of trade liberalization, which are absolute advantages and comparative advantages” . Absolute advantage can be referred to the ability of the country to produce a certain good which more efficient than another country while comparative advantage can be referred to a country that has more advantage in the production of a good or service, or in other word where the opportunity cost of production in that country is lower than another country. David Ricardo was the one who developed this basic theory of comparative advantage.

When a country has the advantages in all goods and services and they specialize in it, “then total output and economic welfare can be increased. This is true even if one nation has an absolute advantage over another country”.

However, Ricardo demonstrated numerically that if England specialized in producing one of the two goods, and if Portugal produced the other, then total world output of both goods could rise. If an appropriate terms of trade (i.e., amount of one good traded for another) were then chosen, both countries could end up with more of both goods after specialization and free trade…

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