While he was arguing for free trade, he came up with the idea of comparative costs, which are today called comparative advantages. His idea explained that a country that trades for products that it can get at lower prices from another country is better off than if it had made the products at home.
Economists use his reasoning today to explain why agricultural price supports do not help farmers but do make owners of farmland wealthier... displayed 300 characters
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David Ricardo took economics to a completely different level than ever before. He formalized the Classical System more clearly than it had ever been done. He developed what became known as the "Classical" or "Ricardian" School throughout Great Britain and other places. Awhile after Ricardo's death, Piero Sraffa finally solved the "invariable measure of value," and sparked interest in Ricardo's theory again... displayed next 300 characters
It follows that in a trading relationship the U.S. should allocate at least some of its scarce resources to producing food and China should allocate at least some of its scarce resources to producing clothing, because this is the most efficient allocation of the scarce resources and allows the price of food and clothing to be as low as possible...
Opens up domestic market to more competition, stimulates greater efficiency in domestic market and reduces monopoly power
2. Creates larger market, helping firms to benefit from economies of scale
While comparative advantage is often represented numerically, absolute advantage is not. The idea that free trade can be advantageous for countries was based on the concept of absolute advantages in production...
The theory of comparative costs argues that, put simply, it is better for a country that is inefficient at producing a good or service to specialise in the production of that good it is least inefficient at, compared with producing other goods...
While, in general, crude oil is fungible, one crude oil can be substituted for another, many refineries are optimized by refining crude oil with specific qualities Also, depending on the global crude oil market condition at the time, the price difference between heavy and light crude oils varies, thus changing the economic dynamics for different refineries...
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