Question

Ricardo’s theory of comparative advantage suggests that specialization and international trade reduce the national income of an economy. True or False

Answer 1

Answer:    False

Explanation:  According to this theory of the English economist David Ricardo, the comparative advantage is in fact the ability of a particular company or the whole national economy to produce competitive goods, that is, with fairly good quality and always a slightly lower price than the competition, or as low as possible, and thus competitive with its trading partners. In this way, the company or the economy will sell certain products at a lower price than the competition and thus have a higher revenue and develop a larger sales network, both domestically and internationally. Job specialisation and division of labour are the basic prerequisites for competitor manufacturing, i.e for this Ricardo's theory of comparative advantage.

Increasing of competitive production, i.e lower prices of products compared to competitors, which is achieved by specialisation, leads to expansion of the sales network at the international level, which certainly contributes to national income and the economy in general. We are witnessing that many economically developed countries are engaging specialised labour for well-defined production, as well as cheap labour to reduce production costs and product prices, and such countries have developed international sales networks and strong national economies with high incomes.