1.3 Theory of comparative advantage
In his theory put forward in a book published in 1817, David Ricardo argued that what was needed
for two countries to engage in international trade was
He believed that two
countries can still gain, even if one country is more productive then the other in all lines of
Using the Labour Theory Value, Ricardo’s contribution was to show that a sufficient
basis for trade was a difference opportunity costs, not in absolute costs.
He illustrated his theory with
two countries and two commodities, I and II and A and B respectively.
COST OF PRODUCING ONE UNIT
We can observe that country I has complete absolute advantage in the production of both
commodities since it can produce them with a lower level of resources.
Country I is more efficient
than country II.
Ricardo believed that even then there could still be a basis for trade, so long as country II is not
equally less productive, in all lines of production.
It still pays both countries to trade.
important is the Comparative Advantage.
A country is said to have comparative advantage in the