Explaining the Theory of Comparative Advantage Using the Concept of Opportunity Cost

Eduardo R. Zayas-Quiñones

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David Ricardo was a brilliant British economist and one the most important figures in the development of economic theory. Ricardo argued that there are advantages to a country in producing those goods that it can produce most efficiently - even if the country has absolute advantage in the production of all goods. Ricardo went on to say that a country should purchase those products that it produces with less efficiency from other countries even if it has an absolute advantage in producing these. To understand how this works, one would have to evaluate such an advantage in terms of resource opportunity cost. Following Ricardo's theory, suppose that a country had an absolute advantage in the production of widgets, gadgets and sprockets. Let's also suppose that each of these required varying resources to produce (See Table-1).

Efficiency Ranking

Product

Resources

Units

 

1

Widgets

10

20

2

Gadgets

10

15

3

Sprockets

10

10

Table-1

Because each country has a limited number of resources, utilizing resources in producing those goods in which it has the most comparative advantage would result in increased production. To me this almost sounds like achieving economy of scale in terms of available resources - let's take a look at the math.

If I decided to import Sprockets, I would have 10 resources I could use in the production of either Widgets, Gadgets or any combination thereof. If for the sake of argument I decided to divert these resources to the production of Widgets, I would now have the ability to produce twice as many (40) with a high level of efficiency (that's how the theory explains it).

References:

Hall & Lieberman (2001) Introduction to Economics, 1st edition [University of Phoenix Print Version]. South-Western College Publishing, OH: Thomson Learning Inc.

The History of Economic Thought Website:
http://cepa.newschool.edu/het/profiles/ricardo.htm

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