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CHAPTER 2 ( THE LAW OF COMPARATIVE ADVANTAGE) - Coggle Diagram
CHAPTER 2
( THE LAW OF COMPARATIVE ADVANTAGE)
INTERNATIONAL TRADE THEORIES
18 CENTURY
( ABSOLUTE ADVANTAGE)
Develop by Adam Smith ( Scottish economist)
19 CENTURY(COMPARATIVE ADVANTAGE
Developed by David Ricardo ( British economist)
16 CENTURY
(MERCANTILISM)
Developed by European states
20 CENTURY(HECKSCHER-OHLIN (H-O)
Develop by Eli Heckscher & Bertil Ohlin ( Swedish Economist)
MERCANTILISM
Mercantilism is a political economy system aims at generating wealth by limiting imports & encouraging exports
Belief that nation could become rich & powerful only by exporting more than import
3 mechanism used: trade surplus, govt intervention & colonialism
Economic system or wealth determine by accumulation of gold and silver
ADAM SMITH THEORY OF ABSOLUTE ADVANTAGE
A country is said to have an absolute advantage if it could produce more of one good than another country, using same amount of resource
Attack the mercantilists view , market forces (dd should determine the direction, volume & composition of trade not through govt interventions
The produce of a country land and labour be properly consider national wealth
Benefit of trade is division of labor and colonies served purpose such as the policies in the home country
ASSUMPTION OF ABSOLUTE ADVANTAGE
Only 2 countries
Full employment of factors of production
One nation has an absolute cost advantage in one good while the other nation has an absolute advantage in the other good
Absolute advantages is can do more of something during a given time,while someone can have every absolute advantage
THEORY OF COMPARATIVE ADVANTAGE
• A country is said to have a comparative advantage if it has the least opportunity cost in production of one of the two products
Opportunity cost represent the amount of good that has to be sacrificed by one country when it want to produce another good
ASSUMPTIONS OF COMPARATIVE ADVANTAGE
Only 2 countries
Full employment of factors of production
Perfect mobility of resources (labor can move freely among industries but only within a nation and not capable of moving between nations)
produce a good for the lowest opportunity cost
FORMULA
Lower opportunity cost show a greater efficiency
LABOR THEORY OF VALUE
The value or price of a commodity depends solely on the amount of labor use to produce it
Labour only the resource used in the same fixed proportion in the production of all commodities
CRITICS
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 which is different ,training ,productivity and wages
Opportunity Cost
Value of a person could have received but passed up in pursuit of another option
Lower opportunity cost show a greater effeciency in produce a product