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Chapter 2: The theory of comparative advantage (P41) - Coggle Diagram
Chapter 2: The theory of comparative advantage (P41)
What is it?
Created by David Ricardo
A theory that details which country is more productive in producing a certain product through lower opportunity costs
Opportunity costs - the loss of other alternatives when one alternative is chosen.
If country A could choose to produce 7 lights or 2 bottles of wine, you would work out the opportunity cost for lights as 2/7 = 0.286 & bottles of wine as 7/2 = 3.5
This country has comparative advantage in lights
In this theory, this country should trade their lights with a country that has higher opportunity costs
How comparative advantage is achieved
Sustained period of investments
May lower operating costs
Proximity to raw materials
Such as oil, agricultural land etc
Lower labour costs
Lower input costs creates a great advantage for firms
Subsidies to help native industries
An act of protectionism for domestic markets such as farming subsidies
Building expertise in certain areas
Investing in certain areas through R&D
Investing in human capital
Porter suggestions for building comparative advantage
Factor conditions
Available factors of production such as; land labour, capital, infrastructure, lv of education
Demand conditions
The nature of demand in the home country
Related & supporting industries
The presence or absence of supplier industries and related industries that are internationally competitive
Firm strategy, structure and rivalry
The conditions in the nation governing how companies are created, organised and managed and the nature of domestic rivalry