The Law of Comparative Advantage Essay Example | Topics and Well Written Essays - 2000 words

The Law of Comparative Advantage - Essay ExampleBecause the surmisal failed to understand the integritys of absolute and comparative advantage, which advocates that trade, may not necessarily be a zero-sum game, mercantilists regulations were gradually removed in Britain in the course of eighteenth century after the government has fully embraced Adam Smiths concept of laissez faire (Wikimedia Foundations, Inc).The greatest challenge to mercantile system was Adam Smiths theory of absolute advantage. It is said that Smiths publication of the book The Wealth of Nation in 1776 has ended the rule of mercantilism as an economic philosophy. In contrast to the necessity of government control in the mercantilists philosophy, Adam Smith advocated the laissez faire system, with limited government intervention in the economy.Particularly, Smith believe that trade would be beneficial to both(prenominal) countries through specialization. In practical terms, when one country is more efficient t han another country in the production of one goodness but is less efficient in the production of another, then both can gain by specializing in the commodity in which it has the absolute advantage. ... As trade is deemed beneficial to all, restrictions are discouraged and limited government intervention is advised. An Unchallenged TheoryAn enhancement and definitely a higher notch than the theory of absolute advantage is the law that says that one country can benefit from trade even if it is less efficient in the production of both commodities. It is the law of comparative advantage an impetus for small nations to actively participate in trade as it is believed to benefit both the big and the small countries. Introduced by David Ricardo in 1817 through his book On the Principles of Political Economy and Taxation, comparative advantage posits that trade can create value for both countries even if one has the less resources in the production of all goods. Using the production possib ilities frontier, Ricardo was able to prove this, achieving a significant breakthrough in the field of international economics. Practically, Ricardo believes that given the situation, both countries can still gain by having the less efficient country specialize in the production and exportation of the commodity in which its absolute discriminate is smallest and import the product in which it has its greatest absolute disadvantage. The commodity in which one country has the least absolute disadvantage can be legal opinion of as one in which it has the comparative advantage. The gains are realized as both countries specialize in the production of commodity in which it has the least probability cost (Mankiw). The Gains from Trade A Simple Numerical ExampleTo facilitate understanding of the gains from trade, we cite the example from the Principles of Macroeconomics book of N. Gregory Mankiw. Given that it takes 20 hours for farmer to find 1 lb of meat and 10 hours to produce 1