The document summarizes David Ricardo's theory of comparative advantage. It explains that according to Ricardo, countries can benefit from trade even if they do not have an absolute advantage in producing goods, as long as they have a comparative advantage in at least one good. This is illustrated using data showing that while England has higher absolute costs of production than Portugal for both wine and cloth, it has a lower relative production cost for cloth, giving it a comparative advantage. International trade allows both countries to specialize in the goods they have a comparative advantage in, increasing total world output.

2. The economist David Ricardo in this book
“Principles of Political Economy and
Taxation “systematically represented the
comparative cost theory. He emphasized
that countries can gain from trade not only
if they had an absolute advantages As put
forward by Adam smith but also if they
had a comparative advantages in
production. Ricardo demonstrated that
trade could take place even in the absence
of absolute advantages provided there is a
comparative advantages.

3. A country should produce and specialize in the
goods for which it has the lowest and world
output will be maximized. An advanced country
may be more efficient than an underdeveloped
nation in every line of production but its degree of
superiority may differ from one commodity to
another. According to Ricardo, the advance
country is said to have a comparative advantages
in the commodity in which the degree of
superiority is higher and a comparative
disadvantages in the good in which the degree of
superiority is lower.

4. Countries Labor cost of
production
hours 1unit of
wine
Lower cost of
production in
hours -1 unit of
cloth
Portugal 80 90
England 120 100

5. This is a two country two produce model.
Ricardo has England and Portugal as examples.
The two goods that they produce in the
example are wine and cloth as these were the
main production areas in the two countries. He
express the cost of these was the main
production in labor time.

6. 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*100) of English effort. 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.

7. 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.

8. If England and Portugal do not trade but
produce and consume in isolation the price of
the products in the two countries will be
determined by their respective local costs of
production.
In the table we express the cost of one
commodity in terms of the other commodity.

9. Country Cost of wine in terms of
cloth
Portugal 1 unit = 0.89 units of
cloth
England 1 unit = 1.2 units of
cloth

10. Indicate how much of one domestic product
must be exported to import one unit of
foreign good. It is the ratio between (total
quantity of goods exported and (total
quantity of goods imported).
Terms of trade =
Total quantity of goods Exported
Total quantity of goods imported.

11. If more imports can be obtained with less
exports in the country terms of trade will be
stronger. The international terms of trade will
be determined through the interaction of
demand and supply.

12. If England can import one unit of wine at price
less than 1.2 units of cloth it would gain ,on the
other hand if Portugal could import more than
0.89 units of cloth both the countries will gain
from trade. The equilibrium rate of exchange
for the two goods will be determined between
the two values mentioned.

13. Let us assume that the international price of
one wine is equal to one unit of cloth. With this
rate of exchange, both countries will benefit.
England will benefit because it is able to get
one unit of wine for a price less than 1.2 units
of cloth, which is its domestic exchange ratio
with wine, Portugal will benefit because it is
able to get more than 0.89 units of cloth for one
unit of wine, which is its domestic ratio .

14. When each country specializes in
the production of that commodity
in which it has a comparative
advantage, it leads to specialization
and division of labor. With this the
total word output of every
commodity involved necessarily
increases and all the countries
involved become better off.

15. If the two countries do not trade with each
other and produce one unit each of wine and
cloth, the total cost of producing two units of
wine and two units of cloth in terms of labor
will be as shown below.

16. Country Labor cost in 1
hours for 1
unit of wine.
Labor cost in 1
hours for 1
unit of cloth.
Total Labor
cost in 1 unit
of wine and
cloth.
Portugal 80 90 170
England 120 100 220
Total cost 200(80+120) 190(90+100) 390

17. On the other hand if the two countries trade on
the basis of comparative cost theory the total
cost of production of two units of each product
will be as shown below.

18. Country Labor cost
production in
1 hours for 1
unit of wine.
Labor cost
production in
1 hours for 1
unit of cloth.
Total Labor
cost
Portugal 80*2=160 0 160
England 0 100*2=200 200
Total cost 160 200 360