How the theory of comparative advantage relates to the need for international business?
a. Explain how the theory of comparative advantage relates to the need for international business. ANSWER: The theory of comparative advantage implies that countries should specialize in production, thereby relying on other countries for some products. Consequently, there is a need for international business.
What is theory of comparative advantage with example?
Comparative advantage is what you do best while also giving up the least. For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing. That’s because you’ll make more money as a plumber.
What are the assumptions of theory of comparative cost?
The theory of comparative costs is based on the assumption that labour is used in the same fixed proportions in the production of all commodities. This is essentially a static analysis and hence unrealistic. As a matter of fact labour is used in varying proportions in the production of commodities.
What are the drawbacks of comparative cost advantage theory?
The very assumption that factors of production have perfect mobility internally but they lack international mobility is a serious limitation of the comparative costs theory. Ohlin rejects the classical assumption of the immobility of factors of production between countries as the basis of international trade.
What are the assumptions of Ricardian theory?
The simple Ricardian model assumes two countries producing two goods and using one factor of production. The goods are assumed to be identical, or homogeneous, within and across countries. The workers are assumed to be identical in the productive capacities within, but not across, countries.
What does Ricardian theory ignores?
Ricardo’s theory is a simple one. It ignores factors such as transport costs and assumes that goods are homogeneous. It also ignores intra-firm trade, such as that between subsidiaries of a multinational firm.
What is the theory of Ricardian equivalence?
Ricardian equivalence is an economic theory that says that financing government spending out of current taxes or future taxes (and current deficits) will have equivalent effects on the overall economy. For this reason, Ricardian equivalence is also known as the Barro-Ricardo equivalence proposition.
What is a strong limitation of Ricardian theory?
It is unrealistic to assume that land has only one use. Instead, land has alternative uses. It can be used for variety of purposes. As Ricardo assumed that land has only one use, its supply is completely inelastic.
What is Ricardian theory of international trade?
David Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries engage in international trade even when one country’s workers are more efficient at producing every single good than workers in other countries.
What is modern theory of international trade?
The modern theory of international trade is an extension of the general equilibrium theory of value. Just as differences in individual capabilities are the cause of exchange between individuals, similarly differences in factor prices is the cause of international trade.
What is comparative cost theory of international trade?
This theory is developed by a classical economist David Ricardo. According to this theory, the international trade between two countries is possible only if each of them has absolute or comparative cost advantage in the production of at least one commodity.
What is opportunity cost theory of international trade?
The opportunity cost is what has been given up in order to have some quantity of another thing. If an additional unit of one commodity has to be produced, the productive resources are to be diverted from the production of some other commodity to the given commodity.