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The Theory of Comparative Advantage - 50MINUTES.COM

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Key information

Names: The law of comparative advantage or the law of relative advantage.

Uses: Justification of international trade, the outsourcing of tasks in companies, the division of labour, specialisation and trade.

Why is it successful? The theory offers answers to the questions raised by the principle of absolute advantage put forward by Adam Smith (Scottish economist, 1723-1790), and provides proof that specialisation and trade are mutually beneficial and sources of wealth. It also provides advice to increase efficiency, and consequently productivity.

Key words:

Absolute advantage: The advantage held by a person who is able to produce the same product as someone else, but with a greater output for the same amount of resources.

Factor endowment: The resources that a country possesses, including land, labour, capital and entrepreneurship.

Markets: Efficient organisational structures for economic activity, in which households and companies freely choose to allocate their resources.

Opportunity cost: What is given up produce a unit of a good, measured in units of another good.

Relative advantage: The advantage held by a person who has a lower cost of production in comparison to a country, company or a household.

Specialisation: A focus on the production of a particular good instead of others.

Trade: The action of exchanging one good for another.

Introduction

Nowadays, specialisation and free trade are the norm in the global