Comparative cost advantages

The theory of comparative cost advantages is a model of foreign trade and is intended to compensate for the misconceptions of the theory of absolute cost advantages. It was developed by the English economist David Ricardo. Both theories of cost benefit are generally about Division of labor and specialization.

Definition / explanation

In principle, the theory of the comparative cost advantage says that international trade can also bring cost advantages in such cases if the country has absolute cost disadvantages (compared to another country) in the manufacture of all products.

We are talking about situations in which one country transfers two goods to another country an absolute cost advantage disposes. The naive assumption assumes that this country should manufacture and trade both products.

In fact, according to the theory of comparative cost advantages, it makes more economic sense for this country to limit itself to manufacturing only one of the two products. The product that should be selected is which of the two can be produced more effectively and faster or - better said - which has the greatest absolute cost advantage.

Example - Comparative Cost Advantages

Country A produces armbands and requires an average of 50 man hours for one unit. In addition, Country A produces beach balls and requires an average of 40 hours of work.

Country X makes the same goods, but requires 60 hours of labor for armbands and 80 hours of labor for beach balls.

If one determines the absolute cost advantage for the respective goods, then country A owns it, since it requires less effort for both products. Nevertheless, according to the theory of comparative cost advantages, it makes more economic sense that Country A does not produce beach balls and armbands, but instead focuses exclusively on beach balls. When calculating the total cost benefits, there are savings in terms of workload with such a breakdown.

Restrictions due to trade barriers

Allerdings gibt es Einschränkungen für die komparativen Kostenvorteile durch Trade barriers. Diese machen es trotz eines solchen Vorteils wirtschaftlicher, dass ein Land alle Produkte selbst produziert. Dabei kann es sich um Zölle handeln oder um mengenmäßige sowie qualitative Handelsbeschränkungen. Außerdem gibt es Produkte, die nicht Gegenstand eines Handels werden können. Das trifft vor allem auf viele Dienstleistungen zu.

Summary

  • Theorie der komparativen Kostenvorteile befasst sich mit Division of labor bei der Produktion von Waren zwischen im Vergleich zu anderen Ländern
  • The aim is to achieve the most economical result by distributing production and trade
  • if there are two absolute cost advantages with regard to certain goods, a country should in certain cases only specialize in the production of one good
  • Restrictions exist due to trade barriers such as tariffs or import or export bans
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