David Ricardo comparative advantage theory

*THE CLASSICAL THEORY OF
INTERNATIONAL TRADE WAS
FORMULATED BY ROBERT
TORRENS, DAVID
RICARDO AND JOHN
STUART MILL . THEIR IDEA
RELATE TO THE THEORY OF
COMPARATIVE COST OR
ADVANTAGE .
*BUT THE RICARDIAN THEORY OF
COMPARATIVE ADVANTAGE HAS
BEEN ACCEPTED AND IMPROVED
UPON BY MODERN ECONOMIST
TAUSSIG AND
HABERLER.
RICARDO’S THEORY STATES THAT A
COUNTRY WILL EXPORT THAT
COMMODITY IN WHICH IT HAS A
COMPARATIVE ADVANTAGE AND
IMPORT THAT PRODUCT IN WHICH IT
HAS A COMPARATIVE DISADVANTAGE
THUS A COUNTRY WILL EXPORT THOSE
COMMODITIES IN WHICH ITS
COMPARATIVE ADVANTAGE IS
GREATEST AND IMPORT THOSE
COMMODITIES IN WHICH ITS
COMPARATIVE DISADVANTAGE IS LEAST

1. FREE TRADE, NO
STATE
INTERFERENCE
2. VONSTANT RETURNS
TO SCALE
3. FULL EMPLOYMENT
4. NO TECHNICAL
CHANGES
5. TRADE BETWEEN
THE TWO
COUNTRIES TAKES
PLACE ON THE BASIS
OF BARTER SYSTEM.

*BY GIVING THESE
ASSUMPTION RICARDO
SHOWS THAT TRADE IS
POSSIBLE BETWEEN
TWO COUNTRIES WHEN
ONE COUNTRY HAS AN
ABSOLUTE ADVANDTAGE
IN THE PRODUCTION OF
BOTH COMMODITIES,
BUT A COMPARATIVE
ADVANTAGE IN THE
PRODUCTION OF ONE
COMMODITY THAN IN
THE OTHER
AND
.

*
* Portugal not only has an absolute
advantage (that is an advantage in
terms of the absolute cost) but also has
a comparative (relative) advantage in
the production of wine.The degree of
superiority in the production of wine is
greater. It can produce one unit of
wine with only 67% (80/120) .While it
takes90% (90/100*100) of English
effort to produce one unit of cloth.
Therefore Portugal is more efficient in
the production of wine than cloth.

*
England has an absolute disadvantage in the
production of wine and cloth, but it has a lesser
disadvantages in the production cloth .It can
produce wine with 150 %( 120/80*100) of
Portuguese effort. While it can produce one unit
of cloth with 111 % (100/90*100) of Portuguese
effort. Hence, it is less inefficient in the
production of cloth. Or have lesser
disadvantages in the production of cloth or one
can said it has comparative advantages in the
production of cloth.

REPRESENT -
ENGLAND
REPRESENT -
PORTUGAL
GOOD
(CLOTH)
GOOD
(WINE)

*
*THE COMPARATIVE ADVANTAGE
POSITION OF BOTH IS
ILLUSTRATED IN TERMS OF
PRODUCTION POSSIBILITY
CURVES.
AA1- production
possibility curve of
Portugal
BB1- production
possibility curve of
England
PORTUGAL ENJOYS AN ABSOLUTE
ADVANTAGE IN THE PRODUCTION OF
BOTH WINE AND CLOTH OVER
ENGLAND.

* PORTUGAL IT PRODUCES :-
OA1(WINE)
OA( CLOTH)
AND
ENGLAND PRODUCES:-
OB1(WINE)
OB(CLOTH)
BECAUSE IF IT GIVES UP THE
RESOURCES REQUIRED TO PRODUCE
OB OF CLOTH IT CAN PRODUCE OC1OF
WINE OF ENGLAND

ON THE OTHER HAND,
ENGLAND HAS THE LEAST
COMPARATIVE DISADVANTAGE
IN THE PRODUCTION OF OBOF
CLOTH.
THUS PORTUGAL WILL
EXPORT OA1OF WINE TO
ENGLAND IN EXCHANGE FOR
OB OF CLOTH .

David Ricardo comparative advantage theory

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