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CHAPTER 2: THE LAW OF COMPARATIVE ADVANTAGE - Coggle Diagram
CHAPTER 2: THE LAW OF COMPARATIVE ADVANTAGE
Mercantilism :star:
generating wealth by limiting imports & encouraging exports
nation could become rich & powerful only by exporting more than import
all nations cannot have surplus at the same time
3 mechanism used: trade surplus, govt intervention & colonialism
Britain & France were the most prominent mercantilist nations at that time
Adam Smith Theory of Absolute Advantage :red_flag:
determine the direction, volume & composition of trade
enjoy higher level of production & consumption with trade.
produce more of one good than another country, using same amount of resources
export and import the product.
Assumption
Only 2 countries Only 2 products Full employment of factors of production.
David Ricardo Theory of Comparative Advantage :question:
Gains from Trade
Labour Theory of value
value depends solely on the amount of labor. Labor is homogenous
Critics :green_cross: - labor is not the only factor of production - labor not used in same fixed proportion in the production of all commodities - labor is not homogenous
Opportunity Cost - constant cost
curve alternative combinations of 2 commodities a nation can produce by fully utilizing all resources & using existing technology
a comparative adv : has the least opportunity cost in production of one of the two products.
Lower opportunity cost indicate higher efficiency
Assumptions :
Only 2 countries
Only 2 products
Full employment of factors of production.
All resources in both countries are homogenous
both efficient in producing both goods
Perfect mobility of resources