The comparative advantage is a theory that explains how the world economy is affected by availability of productive resources within a country. It is simply the situation where a country cannot provide everything for itself hence import them from the other countries that have the required resources in large amount. Therefore, it gave rise to the opportunity cost, which is among the fundamental aspects of production. This means that when the opportunity cost is low the country is said to have a comparative advantages in the production sector.
There is an assumption that the comparative advantage of a country takes place in a one-factor economy. The comparative advantage plays a big role in determining the pattern, which is recommended or suitable for the international trade. The key factor for a one-factor economy is the productivity of labor in a variety of industries normally referred to as the unit labor. The concept of unit labor refers to the inverse of production. In the fig. 3-3, the increase in the production of cheese in an hour means that the unit labor requirement is relatively low.
The available resources in the economy of a given country are always limited hence influencing or limiting the level or what is to be produced. Therefore, there are introduction of trade-offs that demand for production of one particular product over the others. The economic resources determining the number of goods that can be produced in a one-factor economy. In a business perspective, people try to maximize their profits or earning thus serving as a tool to determine the supply and the relative price of the two goods in a competitive market.
Using two distinct goods in a one-factor economy would mean that the opportunity cost of the two products is equal to their unit labor requirement ratios. In other terms, one country may be having a high productive of a given product whereas the other experience high productivity levels of the other product. This assumption is supported by the argument that comparative advantage requires the four factors of production.
In this context, the relative price of the two products is determined by the competitive equilibrium of supply and demand. It is very essential to monitor the relationship between different market shares. In fig. 3-3, the market share deals with the production of cheese and wine. One country exports the product (cheese) and in return, it would be able to import the other product (wine) and vice versa. The relationship between the two markets needs to be compared together since it would be unreliable to evaluate them in isolation. The general equilibrium analysis of the two markets would indicate the relative price during and after the trading activities.
The suitable ways of monitoring, the trends of the two markets are by focusing on their relative demand and supply along with the quantities of the two goods. This implies that a major concern would be on the number of Cheese in the supply or in demand, which would be divided by the amount of the other product (wine). The world general equilibrium has it that the relative demand curve that is denoted by RD and relative supply curve denoted by RS in fig 3-3 are equal. Their point of intersection is used to show the relative price of the world. The diagram indicates that the sales of cheese would be minimal when there is a drop in the relative price whereas the increase above the intersection point the labor would the same but would increase it supplies.
Work cited
Hunt, Shelby D., and Robert M. Morgan. "The comparative advantage theory of competition." The Journal of Marketing Ed (2000): 1-15.
