Theory Of Comparative Advantage

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Data and Methodology
This study uses the theory of comparative advantage to explain how Ghana’s resource endowments can give the economy a comparative edge and boast economic growth through exports. Empirical data is imported from the World Bank country database, IMF government of Ghana policy documents, CIA World Factbook and other sources to provide exposition of Ghana exports, challenges in value adding and recommendations making on transformation from primary to manufactures.
The theory of comparative advantage
The theory of comparative advantage by David Ricardo (1817); the foundation of trade submits that economies around the world differ in terms of their resource endowments and/or technological know-how; such as Ghana cocoa production,
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Further, countries face opportunity cost of production due to resource constraints. An economy has comparative in producing a good over other countries, if it can do so at a relatively lower opportunity cost. Gains from trade will arise if the economy with comparative advantage specializes in producing that particular good and trade it for other goods for which it has a comparative disadvantage. Consider an example of two countries: Ghana and China. Both produce two goods; cocoa and clothes. Assume China hours of labour requirements are 40 for cocoa, 30 for clothes, with Ghana requiring 50 for cocoa and 70 for clothes. China is more efficient in both as it takes less man hours to produce both, than Ghana. Without trade, Ghana would need 50 man hours to produce one unit of cocoa or 50/70 unit of clothes, whereas China would need 40 labour hours to produce one unit of cocoa or 40 /30 units of clothes. Ghana will need 120 labour hours in the production and consumption of a unit of both, and China on the other hand will need 70 labour hours for both. Ghana here has comparative advantage in cocoa where as China’s efficiency lies in…show more content…
One factor involved; Labour, which is domestically mobile but immobile internationally. Labour force (amount of labour required) in Ghana is denoted by LF, total labour required to produce cacao is aLFC, and that of clothe is aLFK.We denote total quantities of cocoa as QC and that of clothe as QK. We denote values for China with asterisk; aLFC*, aLFK*, QC*, QK*. Further, Ghana is relatively more efficient in producing cocoa: aLFC/ aLFC*< aLFK/ aLFK*.We assume further that Ghana has a comparative advantage in Cocao due to lower opportunity cost for cocoa interms of clothes as compared to China
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