Absolute & Comparative Advantage
International Trade Theory
The Benefits Of Trade
•Smith, Ricardo and Heckscher-Ohlin show why it is beneficial for a
country to engage in international trade even for products it is able to
produce for itself
International trade allows a country:
•to specialize in the manufacture and export of products that it can
produce efficiently
•import products that can be produced more efficiently in other
countries
Absolute Advantage
• Export those goods and services for which a country is more
productive than other countries
• Import those goods and services for which other countries are more
productive than it is
The Theory of Absolute Advantage: An
Example
OUTPUT PER HOUR OF LABOR
France
Japan
Wine
2
1
Clock
radios
3
5
Absolute Advantage’s Flaw
• What happens to trade if one country has an absolute advantage in
both products?
• No trade would occur
Comparative Advantage
• Produce and export those goods and services for which it is relatively
more productive than other countries
• Import those goods and services for which other countries are
relatively more productive than it is
The Theory of Comparative Advantage:
An Example
OUTPUT PER HOUR OF LABOR
France
Wine
4
Japan
1
9
Clock
radios
6
4
5
6
11
The Theory of Comparative Advantage:
An Example
OUTPUT PER HOUR OF LABOR
France
Japan
Wine
5
4
Clock
radios
6
5
Adam Smith (1722-1790) is the most known economist of all times. In
the work “Research of the nature and the reasons of the peoples
wealth » (1776) he described a system of economic knowledge.
Describe- описать
A.Smith made an essential contribution to the study
of the cost of goods. According to A.Smith, cost of
the goods is defined only by work. This concept, the
labor theory of cost, was going to play a huge role in
the history of an economic science for it answered a
question of wealth
According to -по мнение
the labor theory of cost- трудовая теория
стоимости
sources. (источник)
A.Smith investigated the theory of money, the income, the capital,
division of labor and reproduction.
Reproduction - воспроизводство
David Ricardo (1772-1823) continued traditions of
classical political economy, having developed
further A.Smith's ideas. D. Ricardo released the
theory of labor cost from internal contradictions.
labor cost- трудовая стоимость
Release- освободить
Internal contradiction – внутренное противоречие.
He proved that cost is defined socially by
necessary work.
D. Ricardo explained the process of transferring the cost of means of
production on a finished product. It was D. Ricardo's contribution to
an economic science.
Heckscher (1919)-Ohlin (1933)
Differences in factor endowments not on differences in
productivity determine patterns of trade
Absolute amounts of factor endowments matter
Heckscher (1919)-Olin (1933)
• Labor is not the only Factor of production. We need to account for land,
capital, and technology.
• Factor endowments: extent to which a country is endowed with such
resources as land, labor, and capital.
• Export goods that intensively use factor endowments which are locally
abundant.
Theory of Relative Factor Endowments
(Heckscher-Ohlin)
Factor endowments vary among countries
Products differ according to the types of factors that
they need as inputs
A country has a comparative advantage in producing
products that intensively use factors of production
(resources) it has in abundance
Factor Endowments
• Taken from Heckscher-Olin
• Basic factors:
• natural resources
• climate
• location
• demographics
• Advanced factors:
• communications
• skilled labor
• research
• technology