THE PRINCIPLE OF COMPARATIVE COST ADVANTAGE

Subject: 

ECONOMICS

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Term:

FIRST TERM

Week:

WEEK 8

Class:

SS 3

Topic:

 THE PRINCIPLE OF COMPARATIVE COST ADVANTAGE

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Previous lesson: 

The pupils have previous knowledge of

INTERNAL AND INTERNATIONAL TRADE

that was taught as a topic in the previous lesson

Behavioural objectives:

At the end of the lesson, the learners will be able to

• EXPLAIN THE MEANING OF THE PRINCIPLE OF COMPARATIVE COST ADVANTAGE
• LIST OUT THE ASSUMPTIONS OF THE PRINCIPLE OF COMPARATIVE COST ADVANTAGE
• EXPLAIN THE DIFFERENCE BETWEEN THE PRINCIPLE OF COMPARATIVE COST ADVANTAGE AND COST ADVANTAGE
• LIST OUT THE FACTORS THAT GIVE A COUNTRY THE PRINCIPLE OF COMPARATIVE COST ADVANTAGE OVER ANOTHER COUNTRY

Instructional Materials:

• Wall charts
• Pictures
• Related Online Video
• Flash Cards

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Methods of Teaching:

• Class Discussion
• Group Discussion
• Asking Questions
• Explanation
• Role Modelling
• Role Delegation

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Reference Materials:

• Scheme of Work
• Online Information
• Textbooks
• Workbooks

Content:

The Principle of Comparative Cost Advantage

The law or theory or principle of comparative cost advantage propounded by David Ricardo in 19^th Century, states that a country will be better off, if it specializes in the production of commodities in which it has the greatest comparative cost advantage over others and exchange them for commodities in which it has comparative cost disadvantage. This law is based on the premises of the law of opportunity cost.

Although the principle of comparative cost advantage was first developed in the 19th century, it still holds true today. Countries that specialize in producing goods and services that have a comparative cost advantage can reap many benefits, including economic growth and employment opportunities. However, the principle also has its limitations

A country is said to have comparative advantage over others in the production of a commodity in which it has the lowest opportunity cost than others. The real cost of production in terms of the alternative goods forgone is used in comparison with that of other nations.

The principle operates on some basic assumptions that:

1. There are only two trading countries
2. Only two items are produced
3. There is free flow and mobility of factors of production
4. There is no balance of trade between the two countries
5. There is no transport cost
6. Technology and costs are constant
7. Labour is the only factor of production

Based on these assumptions, the principle can be illustrated in three stages as follows:

1. Nigeria will forgo 15 bags of Cocoa to produce 1 bag of rice or forgo 1 bag of rice to produce 15 bags of Cocoa.
2. Thailand will forgo 5 bags of rice to produce 1 bag of cocoa or forgo 1 bag of cocoa to produce 5 bags of rice.

From the above, we can deduce that Nigeria has a comparative advantage in the production of cocoa while Thailand has comparative advantage to produce rice.

Stage II. With Specialization

Stage III. With Trade

From the tables,

1. The total production of the countries increased with specialization i.e Rice from the initial 110 bags to 200 bags and Cocoa from 170 bags to 300 bags.
2. The trading countries now enjoy improved or higher standards of living because they have more commodities than they could produce before trade.
3. Trade enhanced more efficient allocation of productive resources i.e. labour.

Summary

1. What is the principle of comparative cost advantage and how does it help a country to maximize its economic efficiency?

2. How does the principle of comparative cost advantage differ from the theory of absolute advantages?

3. How do changes in relative prices and shifts in demand and supply affect a country’s ability to benefit from comparative cost advantages?

4. What are some of the factors that can give a country a comparative cost advantage in certain industries or sectors, and what are some of the challenges that must be overcome to fully capitalize on these advantages?

5. How can policymakers and businesses work together to create an enabling environment that helps countries capitalize on their comparative cost advantages?

Answers:

1. The principle of comparative cost advantage refers to the idea that a country is most economically efficient when it produces goods and services that utilize its comparative advantages, or its relative cost efficiencies compared to other countries. This can be achieved by focusing on the production of goods and services where a country has lower production costs than its competitors, which allows it to offer these goods and services at more competitive prices.

2. In contrast to the theory of absolute advantage, which focuses on the absolute efficiency of a country in producing certain goods and services, the principle of comparative cost advantage is concerned with understanding the relative efficiency of a country in producing different goods and services. This can be affected by changes in relative prices, shifts in demand and supply, as well as other external factors that affect a country’s ability to produce certain goods and services at lower costs.

3. To fully capitalize on comparative cost advantages, a country must be able to respond effectively to changes in relative prices and shifts in demand and supply by adjusting its production strategies, as well as by investing in infrastructure, technology, and other resources that can help it take advantage of its cost efficiencies. This requires close collaboration between policymakers and businesses to ensure that the right conditions are in place to support economic growth and development.

4. Some factors that can give a country a comparative cost advantage in certain industries or sectors include its access to natural resources, proximity to major markets and transportation routes, availability of skilled labor, and presence of strong supporting industries. However, challenges that must be overcome to fully capitalize on these advantages may include weak infrastructure, lack of technological capacity, poor regulatory environment, and other obstacles to growth.

5. In order for countries to capitalize on their comparative cost advantages and achieve sustained economic growth, policymakers and businesses must work together to create an enabling environment that supports innovation, trade and investment, as well as other policies and strategies that can promote long-term economic development. This might include supporting education, training, and skills development; investing in infrastructure and technology; facilitating trade and foreign investment; and promoting policies that support economic integration, competition, and other key drivers of competitiveness.

Presentation

The topic is presented step by step

Step 1:

The class teacher revises the previous topics

Step 2.

He introduces the new topic

Step 3:

The class teacher allows the pupils to give their own examples and he corrects them when the needs arise

EVALUATION

Question 1: What is the principle of comparative cost advantage?

a) It refers to the ability of a country or region to produce goods and services at a lower cost than other countries or regions.

b) It is based on the idea that countries should specialize in producing goods and services that they are best at, and then trade with other countries to obtain the products they cannot produce themselves.

c) It argues that countries should focus on producing goods that have the highest opportunity costs, in order to maximize profits.

d) It states that in order for international trade to be beneficial, countries must have a competitive advantage in the production of some good or service.

Question 2: How does comparative cost advantage affect international trade and global economic growth?

a) It creates a level playing field for countries to compete in the global economy, driving innovation and greater productivity.

b) It allows countries to produce goods more efficiently, thereby increasing their profits and stimulating economic growth.

c) It promotes the free flow of goods and services between countries, allowing them to specialize in what they do best.

d) It encourages countries to adopt new technologies and techniques that increase productivity, ultimately driving economic growth.

Question 3: What are some of the challenges associated with comparative cost advantages?

a) It can lead to a race to the bottom, as countries compete on price and lower labor costs.

b) It can create dependencies and imbalances in trade, as countries become overly reliant on certain goods or services.

c) It can cause environmental damage, as countries compete to produce the cheapest goods, even if this comes at the expense of the environment.

d) It can cause trade wars and protectionist policies, as countries try to defend their comparative cost advantage in certain industries.

Question 4: How can governments and businesses effectively manage the challenges of comparative cost advantage?

a) They can invest in research and development, to develop new technologies and techniques that improve productivity while reducing costs.

b) They can work to build strong relationships with trading partners, creating a more collaborative and mutually beneficial trade environment.

c) They can focus on creating policies and regulations that protect workers while promoting a strong economy.

d) They can work to promote free trade, while also supporting local industries and workers through protectionist policies.

Answers:

1. c) The principle of comparative cost advantage refers to the ability of a country or region to produce goods and services at a lower cost than other countries or regions.

2. a) Comparative cost advantage affects international trade and global economic growth by creating a level playing field for countries to compete in the global economy, driving innovation and greater productivity.

3. d) Some of the challenges associated with comparative cost advantage include trade wars and protectionist policies, as countries try to defend their comparative cost advantage in certain industries.

4. c) Governments and businesses can effectively manage the challenges of comparative cost advantage by focusing on creating policies and regulations that protect workers while promoting a strong economy. They can also work to build strong relationships with trading partners, creating a more collaborative and mutually beneficial trade environment.

EVALUATION

1. Explain the concept of comparative cost advantage in International trade.
2. What are it’s contributions to trade among nations?

Conclusion

The class teacher wraps up or concludes the lesson by giving out short notes to summarize the topic that he or she has just taught.

The class teacher also goes round to make sure that the notes are well copied or well written by the pupils.

He or she makes the necessary corrections when and where the needs arise.

.