Comparative advantage
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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.
Transcript of 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.
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
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
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.
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
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)
