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THE LAW OF COMPARATIVE ADVANTAGES - Coggle Diagram
THE LAW OF COMPARATIVE ADVANTAGES
Mercantilism
meaning: Political economy system aim at generating wealth by limite imports & encourage export. Eg: tariff, quotas
Belief that nation could become rich & powerful only by exporting more than import.
Developed by European state
Amount of gold & silver is fixed, all nation cannot surplus at the same time.
3 mechanism used
trade surplus
government intervention
colonialism
Labor Theory of Value
Labor can only resource used in the same fixed proportion in the production of all commodities.
labor is homogenous
Critics:
Labor is not only FOP
Labor not used in same fixed proportion in the production of all commodities
Labor is different training productivity and wages.
Theory Of Comparative Advantage
Ricardo considered the limitation of Adam Smith's absolute advantage
If a country has at least opportunity cost in production of one of the two product, the country will export it.
Lower opportunity cost, indicates higher efficiency in the production.
Adam Smith Theory of Absolute Advantage
Suggest both nation must enjoy higher level of production & consumption trade.
If a country can produce more of one good than another countryusing the same amount of resources.
Attact the mechantilists views
Assumptions
Full employment of FOP
All resources in both countries are homogenous
Only 2 products (eg: rice & car)
Perfect mobility of resources
Only 2 countries (eg: Malaysia & Thailand)