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The Concept of Comparative Advantage as a Milestone of Human Search for the Most Rational Means of Production

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Ricardian Model of Comparative Advantage is constructed in such a way that the difference between the trading countries is in their production technologies only. All other features are assumed identical across countries in the model. Since trade would occur and be advantageous, the model highlights one of the main reasons why countries trade, that is, the dissimilarity in their technology. Moreover, the gains of trade will still accrue to both trading countries “ even when a country has no absolute advantage whatsoever” . Given that an unequal distribution of factors of production across all economies, these economies will have comparative advantages and disadvantages in production.

Secondly, despite the fact that most models on trade conclude that some parties would benefit and some lose from free trade, the Ricardian model shows that everyone could benefit from it. However, a reason for this result is the model’ s simplifying assumption that there is only one factor of production. Also, Ricardo showed by using a simple numerical example that even a technologically inferior country can benefit from free trade. That is, technological superiority is not enough to guarantee continued production of a good in free trade.

Finally, a developed country can compete against some low foreign wage industries. The Ricardian model shows the possibility that industry in a developed country could compete against an industry in a less developed country even though the industry in a less developed country pays its workers much lower wages. Furthermore, in the Ricardian model on foreign trade, the general rate of profit in a country can only be raised by a significant reduction in real wages.

Despite the fact that foreign trade is beneficial to a country as it increases the amount and diversity of the goods available, as well as in terms of affordability because of the abundance and the cheapness of commodities together with incentives to savings and capital accumulation, foreign trade, according to Ricardo, “ has no tendency to raise the profits of stock, unless the commodities imported be of that description on which the wages of labor are expended” .

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