Question

Explain comparative advantage and how it influences global production.

Answer 1

Comparative Advantage is an economic term that refers to an economy's ability to produce goods and services at a lower opportunity cost than that of trade partners. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margin. The law of comparative advantage is popularly attributed to English political economist David Ricardo and his book " Principles of Political Economy and Taxation" in 1817, although it is likely that Ricardo's mentor James Mill originated the analysis.

One of the most important concepts in economic theory, comparative advantage is a solid grasp of opportunity cost. An opportunity cost is a potential benefit that someone loses out on when selecting a particular option over another. In the case of comparative advantage, the opportunity cost ( that is to say, the potential benefit which has been forfeited) for one company is lower than that of another. The company with the lower opportunity cost, and thus the smallest potential benefit which was lost, holds this type of advantage. Another way to think of the comparative advantage is as the best option given a trade-off. If you're comparing two different options, each of which has a trade-off (some benefits as well as some disadvantages), the one with the best overall package is the one with the comparative advantage.

Comparative Advantage has influenced the way economies work from the time that countries first started trading. with each other many centuries ago. Globalization has brought the world together by encouraging more trade among nations, more open financial institutions and a greater flow of investment capital across international borders. In a globalized economy, countries, and businesses are connected in more ways than ever before. Rapid and efficient transportation networks have enabled the cost-effective shipment of goods across the world. The global integration of financial markets has dramatically lowered barriers to international investment. The near-instantaneous flow of information over the Internet enables companies and businesspeople to share knowledge about products, production processes and pricing in real time. Together, these developments improve economic output and opportunities for both developed and developing nations, These factors also cause greater specialization based on comparative advantage.

Less developed countries have benefitted by globalization by leveraging their comparative advantage in labor costs. Corporations have shifted manufacturing and other labor-intensive operations to those countries to take advantage of lower labor costs. Globalization has benefitted developing countries by providing jobs and capital investments that would not have otherwise been available. As a result, some developing countries have been able to progress more quickly in terms of job growth, educational attainment, and infrastructure improvements.

Advanced economies, such as the United States, Canada, Japan and much of Europe, have benefitted from Globalization in numerous ways. The concept of comparative advantage has provided the intellectual basis for most trade policy changes in developed nations over the past half-century. These nations have a comparative advantage in the capital- and knowledge-intensive industries, such as the professional services sector and advanced manufacturing. They also have benefitted from low-cost manufactured components that can be used as inputs into more advanced devices. Additionally , shoppers in advanced economies save money when they are able to buy consumer goods that cost less to produce.