Global Economy. The Ricardo Principle of Comparative Advantage

THE RICARDO PRINCIPLE OF COMPARATIVE ADVANTAGE
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The Ricardo Principle of Comparative Advantage
David Ricardo developed the principle of comparative advantage, which is a pioneer theory and amongst the most well know notion in the field of economics. There is much discussion amongst academic scholars on the application of the principle, based on a lack of consensus of the empirical validity of the methods the concept suggests. Some readers have proven that adjustments made on the data collected cater for any discrepancies that may arise in practical application. The adjustments have provided room for the use of the idea in economic studies to explain various scenarios of interest. The essay offers an illustration of the principle of comparative advantage by Ricardo, the derivation of trade gains from the evolution of international prices, and what hindrances could prevent the achievement of anticipated gains.
By scholarly standards, one can define the Ricardo principle of comparative advantage in the following manner. Comparative advantage is the capabilityof a concerned party to offer goods and services at a low opportunity fee and marginal price compared to another party undertaking a similar endeavour(Anon, 2018, 1). The theory elucidates how the occupation can offer both production parties value, despite the difference in ability for one organization to manufacture goods with less materials. The benefits from the outcome of such a scenario provide what the economic world refers to as trade gains. The author provided an example of the situation as follows (Anon, 2018, 1; Anon, 2018, 2). Suppose two countries, A and B, produce alcohol and fabric, country A can produce the goods at a lower total labour cost than country B. Note that the production costs differ between the two countries. Country A has great ease in the production of both commodities, while country B has greater ease in the production of fabric than alcohol. Country A can produce fabric cheaply than B but can also manufacture excess alcohol and trade the surplus with fabric from country B. Country B benefits from the exchange by obtaining alcohol at a cheaper price. Each country specializes in production that offers the best comparative advantage, and trades the produce for another useful item.
The aim of each party involved is to attain maximum profit from the production of goods. Companies take part in international trade to exchange various merchandises and services (Pearsoncanada.ca, 2018, 193). The parties involved in the trade to exchange goods for which the party in question has comparative advantage. Sometimes one party has absolute advantage in production over the party the country trades with. The absolute advantage arises from the ability of the country in question to manufacture more goods than the competitor with the same quantity of resources. Even in such a case, both trading parties stand to make a gain from the exchange. The country with the absolute advantage will benefit because the good produced for trade offers comparative advantage to the country so the production of the good that needs importation would require less production of the good with comparative advantage (Pearsoncanada.ca, 2018, 193). The opportunity cost for the production of the good the country intends to import causes the necessity of the importation to keep the balance of production. Trade enables both trading parties to consume more product than each individual can consume without trading (Pearsoncanada.ca, 2018, 195). An increase in the total world production after trade facilitates the possibility of...