The Ultimate Quiz on Comparative Advantage

Study Notes

The Theory of Comparative Advantage: Understanding the Basics

Comparative advantage arises when an agent can produce a particular good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade.
Comparative advantage arises from differences in factor endowments or technological progress among individuals, firms, or nations.
David Ricardo's classical theory of comparative advantage explains why countries engage in international trade even when one country's workers are more efficient at producing every single good than workers in other countries.
Ricardo demonstrated that if two countries capable of producing two commodities engage in the free market, each country will increase its overall consumption by exporting the good for which it has a comparative advantage while importing the other good, provided that there exist differences in labor productivity between both countries.
The absolute advantage, comparing output per time (labor efficiency) or per quantity of input material (monetary efficiency), is generally considered more intuitive than comparative advantage, but less accurate.
Classical economists Adam Smith and Robert Torrens first alluded to the concept of absolute advantage and comparative advantage, respectively.
Ricardo's example of comparative advantage involves two countries, Portugal and England, with each producing two goods of identical quality.
If each country specializes in the good for which it has a comparative advantage, then the global production of both goods increases, and both countries can consume more wine and cloth under free trade than in autarky.
The Ricardian model is a general equilibrium mathematical model of international trade, where trade patterns depend on productivity differences.
The world economy consists of two countries, Home and Foreign, which produce wine and cloth. Labor, the only factor of production, is mobile domestically but not internationally.
The relative price of cloth and wine in each country is determined solely by the relative labor cost of the goods.
With free trade, the price of cloth or wine in either country is the world price.Summary Title: The Theory of Comparative Advantage in International Trade
The theory of comparative advantage is concerned with the benefits of specialization and trade, rather than a strict prediction of actual behavior.
The world relative demand and supply for goods determine the world relative price.
The theory assumes that the relative demand curve reflects substitution effects and is decreasing with respect to relative price.
By trading and specializing in a good for which they have a comparative advantage, each country can expand its consumption possibilities.
The terms of trade are the rate at which one good could be traded for another.
Haberler's reformulation of comparative advantage provided a modern opportunity cost formulation and revolutionized the theory of international trade.
Since 1817, economists have attempted to generalize the Ricardian model and derive the principle of comparative advantage in broader settings.
Skeptics of comparative advantage have underlined that its theoretical implications hardly hold when applied to individual commodities or pairs of commodities in a world of multiple commodities.
Empirical works usually involve testing predictions of a particular model.
Structural estimation approaches have built on the Ricardian formulation of two goods for two countries and subsequent models with many goods or many countries.
One of the first tests of comparative advantage was by MacDougall in 1951 and 1952.
Dosi et al. (1988) conducted a book-length empirical examination that suggests that international trade in manufactured goods is largely driven by differences in national technological competencies.The Theory of Comparative Advantage
David Ricardo's theory of comparative advantage
Comparative advantage as a justification for free trade
The relationship between comparative advantage and specialization
The benefits of international trade
Criticisms of comparative advantage, including strategic trade policies and disputes over the benefits of free trade

Description

Test your knowledge on the theory of comparative advantage with this quiz! From understanding the basics of comparative advantage to the benefits of international trade, this quiz covers the key concepts and criticisms of the theory. See if you can answer questions on David Ricardo's classical theory, the relationship between comparative advantage and specialization, and the role of empirical works in testing predictions of the model. Whether you are a student of economics or simply interested in international trade, this quiz is a great way to test your understanding of the theory