Presentation

TAMOMO.Pptx
Comparative
Advantage
Learning
Learning outcomes:
outcomes:
• Students will be able to know what is
comparative advantage, its benefits and its
effects on the International Trade
• Students will be able to solve the calculations in
comparative advantage.
• Students will be able to differentiate
comparative advantage to other economic
advantages.
Comparative advantage
David Ricardo took Smith’s theory one step further by
exploring what might happen when one country has an
absolute advantage in the production of all goods.
According to Ricardo’s theory of Comparative advantage,
it makes sense for a country to specialize in the
production of those goods that it produces most
effectively and to buy the goods that it produces less
effectively from other countries, even if this means
buying goods from other countries that could produce
more efficiently itself
David Ricardo, a political economist, is credited
with developing the comparative advantage thesis in his
LOVE
work Principles of Political Economy andAS HUMAN
Taxation (1817).

EXPERIENCE
Ricardo's widely acclaimed
comparative advantage theory
suggests that nations can gain an
international trade advantage when
they focus on producing goods that
produce the lowest opportunity costs
as compared to other nations.
Example:
•Ireland has a comparative advantage in cheese and butter
•China has a comparative advantage in electronics because it has an abundance
of labor. 
•When the opening of trade between China and Ireland, Irish dairy farmers will
experience higher milk prices and will expand diary production.
•Irish consumers will see inexpensive electronic products from China and will
more electronics than would otherwise have been the case. The beauty of the
system is that dairy is in surplus in Ireland and trade allows it to move to an
area where milk products are expensive and in scarce supply.
•Producers in the exporting country see better prices and consumers in the
importing country see lower prices. 
• Grassland in Ireland and labor in China.
ComparativeAdvantage
Comparative Advantagebenefits:
benefits:

•Lower Opportunity Costs and Higher Profit Margins

Countries with a comparative advantage can concentrate
their labor, capital, and resources on output with lower
opportunity costs, resulting in larger profit margins.

•Increased Efficiency
Businesses opt to focus their production on commodities
or services that they can produce more efficiently and then
purchase from trading partners what they can't.
International business: Comparative advantage allows
companies to enter into trade with other countries and create
job opportunities where they may have been before.

Access for consumers: This business practice can encourage

companies to price items lower, allowing some consumers
access to products they couldn't afford otherwise.

Reallocated funds: Companies can use the money they save

on producing their goods and services to improve the
company in other areas, such as increasing employee wages
or improving the work environment
ABSOLUTE COMPARATIVE
ADVANTAGE ADVANTAGE

refers to the refers to the ability to

produce goods and
ability to produce
services at a lower
more or better opportunity cost, not
goods and necessarily at a
services than greater volume or
somebody else.  quality.
What Effects Does Comparative Advantage
Have on International Trade?

A country with a comparative advantage will concentrate its

capital, labor, and natural resources on commodities and services
with lower opportunity costs and larger profit margins. One of
the most essential ideas in economics is comparative advantage.
This concept in classical economics explains why trade and
exchange can provide people, governments, and companies with
larger collective benefits than they could achieve on their own.
Trade benefits countries that specialize based on comparative
advantage.
Comparative advantage is usually measured in
opportunity costs, or the value of the goods that could be
produced with the same resources.
Example:
Step 1: Calculate the Opportunity Cost of Each Good from Each Country
China's Opportunity Cost
Calculating China's Opportunity Cost Iron Ore China's opportunity
cost of 1 unit of iron ore. China can produce 80 iron ore or 100
cars. 

Calculating China's Opportunity Cost of 1 Iron Ore

China can produce 80 iron ore or 100 cars. 
Therefore; 80 iron ore = 100 cars. 
We need to make it 1 iron ore, so we divide both sides by 80. 
80 iron ore / 80 = 1 iron ore, 100 cars / 80 = 1.25 cars 
Hence, 1 iron ore = 1.25 cars. 
Calculating China's Opportunity cost of 1 Car
China can produce 100 cars or 80 iron ore. 
Therefore; 100 cars = 80 iron ore. 
We need to make it 1 car, so we divide both sides by 100. 
100 cars / 100 = 1 car 80 iron ore / 100 = 0.8 iron ore.
Hence, 1 car = 0.8 iron ore.
 Australia's Opportunity Cost
Calculating Australia's
Opportunity Cost Iron Ore
Australia's opportunity cost of 1
unit of iron ore. Australia can
produce 70 iron ore or 50 cars. 

Calculating Australia's Opportunity Cost of 1 Unit of Iron Ore

Therefore; 70 iron ore = 50 cars 
We need to make it 1 unit of iron ore, so we divide both sides by 70. 
70 iron ore/ 70 = 1 iron ore, 50 cars / 70 = 0.71 cars 
Hence, 1 iron ore = 0.71 cars.
Calculating Australia's Opportunity cost of 1 Unit of Car
Australia can produce 50 cars or 70 iron ore. 
Therefore; 50 cars = 70 iron ore. 
We need to make it 1 car, so we divide both sides by 50. 
50 cars / 50 = 1 car 70 iron ore / 50 = 1.4 iron ore 
Hence, 1 car = 1.4 iron ore.
Step 2: Plot the opportunity costs on the Two Way Table
Step 3: Identify the Comparative Advantage
Comparative Advantage in Iron Ore
For Iron Ore, the opportunity cost for China
is 1.25 Cars and Australia's is 0.71 Cars. As
Australia has the lowest opportunity cost, it
should produce iron ore. 

Comparative Advantage in Cars

For Cars, the opportunity cost for china is
0.8 Iron Ore and for Australia is 1.4 Iron
Ore. As China has the lowest opportunity
cost, it should produce cars. Hence,
Australia has a comparative advantage in
Iron Ore and China has a comparative
advantage in Cars. 
Your Turn: Find Out Who Has the Comparative Advantage in Rice

Now it's your turn! The production possibilities of wheat and rice are shown for Mexico
and Vietnam. Calculate the opportunity costs to find out which country has an absolute
and comparative advantage in the production of rice.
•Due to exchange opportunities and higher
total output and level of consumption,
comparative advantage lead to gain from
trade.

Gain from trade - refers to extra production and

consumption effects that countries can achieve
through international trade and it helps to lowering
prices for consumers.
Gains from trade
• Imagine that Ghana exploits its comparative advantage in the
production of cocoa to increase its output 10 tons to 15 tons.
• This uses up to 150 units of resources, leaving the remaining 50 units
of resources to use in producing 3.75 tons of rice.
• Meanwhile, South Korea specializes in the production of rice,
producing 10 tons. The combined output of both cocoa and rice has
now increased.
• Before Specialization, the combined output was 12.5 tons of cocoa
and 12.5 tons of rice. Now it is 15 tons of cocoa and 13.75 tons of
rice (3.75 tons in Ghana and 10 tons in South Korea)
Immobile resources
are those that do not easily move from company to
company in the short run. This stops competitors
from easily replicating resources and competitive
strategies employing those resources. Intangible
resources are usually immobile.
Diminishing returns

Diminishing returns to specialization occur when more

units of resources are required to produce each additional
unit. While 10 units of resources may be sufficient to
increase Ghana’s output of cocoa from 12 tons to 13 tons,
11 units of resources may be sufficient to increase output
from 13 to 14 tons, 12 units of resources to increase output
from 14 tons to 15 tons, and so on.
 THANK YOU!
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www.atarsurvivalguide.com/content/calculating-comparative-adva
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https://
www.econ.iastate.edu/ask-an-economist/any-real-world-examples-
comparative-advantage
https://
www.indeed.com/career-advice/career-development/comparative- • HUI SOON LOPE
advantage
https://www.analyticssteps.com/blogs/what-comparative-advantag
• RICLYN PENARIDONDO
e-and-why-it-important