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David Ricardo's LAW OF COMPARATIVE ADVANTAGE

The concept of comparative advantage also involves the concept of opportunity cort. An opportunhty cost is equal to the potential gain one could achieve from applying an asset or factor of production to the creation of one product as opposed to using the asset or factor of production to create another product.

The concept of an opportunity cost is easily understood when one considers alternative income generating opportunities. There may be reasons other than income to pursue the opportunity associated with the lower return; however, there is an opportunity cost associated with such a decision. The opportunity cost in such a case is the difference between the gains associated with the two opportunities.

The concept of opportunity cost is somewhat less easily understood when "gain" is defined as cost minimization. If an asset or factor of production can be applied to the creation of two products that are characterized by differing amounts of the use of an asset or a factor of production required in creating each product, an opportunity cost exists that is the difference in the costs required to create the two products.

When the concept of comparative advantage is applied to international trade one state may have an absolute advantage over another state in relation to the costs of production of two separate products. Each of the two states, however, has opportunity c

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David Ricardo's LAW OF COMPARATIVE ADVANTAGE. (2000, January 01). In LotsofEssays.com. Retrieved 23:36, October 25, 2014, from http://www.collegetermpapers.com/viewpaper/1304222084.html
 
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