Entrep 10

• Comparative advantage


  A producer can produce a good or service at a lower opportunity cost than others
• If a country can produce goods or service at a lower cost than other countries, it has comparative advantage
• Opportunity cost is what is lost or missed out on when choosing one possibility over another
• Adam Smith was among the first to put in writing the theory of comparative advantage
• Specialization and division of labor in large-scale industries

  Provided the base for lowering labor costs, ensuring effective competition across countries
• Extent of specialization and division of labor

  Dependent upon the size of the market
• Larger market


  Encourages a greater degree of specialization and division of labor, leading to the development of international trade
• Factors classical theorists believe influence specialization

  • Climate, qualities of soil, natural resources, innate and acquired capacities of people, real capital
• Industrial capitalism


  An economic system where trade, industry, and capital are privately controlled and operated for profit
• Free trade was championed by both Smith and Ricardo as a route to achieve production efficiency at a global level
• Ricardo’s cost calculations were based on labor hours treated as a single homogenous input
• Comparative advantage is considered necessary to ensure mutually gainful international trade across borders, warranting complete specialization in the specific commodity with a comparative advantage in terms of labor hours used per unit of output
• The theory of comparative advantage was formulated by David Ricardo in his 1817 book “On the Principles of Political Economy and Taxation”
• A country boosts its economic growth the most by focusing on the industry in which it has the most substantial comparative advantage
• Developing countries with a comparative advantage in agriculture should continue to specialize in agriculture and import high-technology widgets from developed countries with a comparative advantage in high technology
• David Ricardo started out as a successful stockbroker, making USD 100 million in today’s dollars. After reading Adam Smith’s “The Wealth of Nations,” he became an economist
• Ricardo developed the theory of monetarism, the theory or practice of controlling the supply of money
• Ricardo, after being a successful stockbroker, became an economist after reading Adam Smith’s “The Wealth of Nations”
• Ricardo pointed out that significant increases in the money supply created inflation in England in 1809
• Ricardo developed the theory of monetarism, the theory or practice of controlling the supply of money as the chief of stabilizing the economy
• Ricardo developed the law of diminishing marginal returns, which states that there is a point in production where the increased output is no longer worth the additional input
• In older economic terms, comparative advantage has been opposed by mercantilism and economic nationalism
• Mercantilism and economic nationalism


  Oppose comparative advantage
• Countries should shelter and invest in industries until they become globally competitive
• David Ricardo’s theory of comparative advantage posits that countries export the goods they have abundant production factors for, while they import the goods for which they have scarce production factors
• Relative intensities of production factors (land, labor, and capital) determine the comparative advantage of a country
• Heckscher and Ohlin determined that the cost of any factor or resource was a function of supply and demand
• The Hechkscher-Ohlin Theory or H-O theory is based on a country’s production factors - land, labor, and capital
• The H-O theory is also called the factor proportions theory or the resources and trade theory
• The Hechkscher-Ohlin-Samuelson (HOS) model is an elaboration of the Hechkscher-Ohlin Theory
• The Hechkscher-Ohlin-Vanek model is an extension of the Hechkscher-Ohlin Theory
• David Hume offered the theory of the price-specie flow mechanism


  1776
• Division of Labor


  The separation of a work process into a number of tasks, with each task performed by a separate person or group of persons
• Trade Surplus


  The amount by which the value of a country's exports exceeds the cost of its imports
• Industrial Capitalism


  The second phase of capitalism in which industries/factories became the dominant factor in the production of goods
• Absolute Advantage


  The country's inherent ability to produce specific goods efficiently and effectively
• Comparative Advantage


  The country's capability to produce the specific good at lower marginal cost
• Marginal Cost


  The cost incurred in producing an additional unit of product
• Opportunity Cost


  The value you will get from an alternative that you did not choose
• Bartering


  Involves a direct trade/exchange of goods and services between 2 parties