Question

“A country which has an absolute disadvantage in the production of any two goods can still have a comparative advantage in the production of one of those goods, which it can produce efficiently and export.’’ Explain the underlying theory with an example.

Answer 1

International trade based on the principle of Ricardian comparative advantages: According to this theory, a country has a comparative advantage in the production of one commodity, will produce that commodity and export conversely import that commodity in which the country has comparative disadvantages.

Country A and B. Suppose country A produces cotton and wheat. Another country B also produces cotton and wheat. Let country A produce 100 units of cotton by 10 days of labour, also country A produce wheat by 100 units of wheat by 10 days of labour. Country B produces 60 units of cotton.

Or 

120 units of wheat by using 10 days of labour. 

In-country A: the cost ratio is 100 units of cotton =100 units of wheat.

Or 

1 unit of cotton = 1 unit of wheat

In-country B: the cost ratio is 6d units of cotton = 120 units of wheat. 

Or

1 unit of cotton = 2 units of wheat

These differences in cost ratio will enable the two countries benefits from trade.

In the above example country, A has a comparative advantage of cotton and country A has a disadvantage of wheat.

Similarly, country B has a comparative advantage in wheat and disadvantage in cotton. So country A exports cotton and imports wheat from country B. In this way, international trade takes place between countries.