The paper "Irrelevance of Absolute Levels of Productivity - Theorem" is a great example of business coursework. The Theorem was first formulated and conceptualised by the Robert Torrens in 1815, but it was only with the coming of David Ricardo that the theorem was evolved and became more popular. David Ricardo detailed it in his book ‘ On the Principles of Political Economy and Taxation’ , in the year 1817. The theorem basically follows the principle of the comparative advantage that each firm has in the production of certain goods and services in relation to others at a lower opportunity cost which gives them an advantage in the market.
The theorem then goes on to explain as to how this advantage should be exploited to ensure that the maximum utilization of the resources is being carried out during the production process. It continues to say that if each specialises and then trade then the production opportunities can be exploited to ensure greater and more efficient production for the minimal amount of resources used. Irrelevance of absolute levels of productivity: The theorem most believe calls for the establishment of international trade practices to be established.
This may hold true to a certain extent but the reality of the matter remains that what Ricardo was talking about was the comparative advantage of opportunity cost in specialization (Courant, Paul N, Deardorff A V, 1992). He gave the example of England and Portugal. As he pointed out the cost of production of wine and cloth in Portugal was cheaper than the cost of production of wine and cloth in England. But even though the cost of labour in the production of cloth is cheaper in Portugal than in England, it would be cheaper if Portugal produced only wine and channelized all its resources towards the production of wine.
England has a high cost of wine production and could channelize all its resources towards the production of cloth and the two can then go on to trade. It would prove cheaper to both countries to specialise in one arena and then establish trade relations. Given this scenario that was detailed by Ricardo, most people believe that he was advocating foreign trade, which holds true to a certain extent But the theorem of comparative advantage is not focusing on trade but on the fact that each company or firm has a certain opportunity cost advantage over the other in the production of certain goods.
Given this advantage the company should focus on the production of that good alone so as to look into minimal wastage of the limited amount of resources that mankind has at its disposal and optimum usage can be ensured. But there has to be realised that the focus of the theorem of comparative advantage is not on the absolute advantage that a firm may have over another firm as this may lead to the wastage of material.
It is about the comparative advantage that a firm holds over the production cost of the other (Lutz M 2008). For example, in the example illustrated by Ricardo in his book, the absolute cost advantage for both cloth as well as wine was present in Portugal and the cost of production of both cloth and cotton was higher in comparison in England. But the cost of production of wine was considerably higher than that of cloth, which was cheaper.
It would be cheaper for Portugal to focus on the production of just wine and direct all the resources towards the production of wine in the country. Thus, the level of employment would not deteriorate as the country would be producing larger amounts of wine to export to England although the production of cloth would stop. On the other hand in England, the focus would be only on the production of cloth and wine production would be stopped.
This would help both countries realise the comparative cost advantage of production in wine as well as cloth, although the absolute advantage is in favour of Portugal. In the same manner, in case of companies or firms, it might be easier for one firm to produce one product and specialise in the production so that a comparatively lower cost of production can be established than say if the firm was producing a number of products and specialising in none (Chang Ha-Joon 2008). Thus, the number of resources that are employed in the production process would be reduced considerably while the levels of production will increase leading to better efficiency and economy in all firms.
This would lead to the development of a more sustainable method of production.