David Ricardo developed 'Theory of Comparative Advantage' in 1817.
According to this theory,"A country should specialize in producing &
exporting those products in which it has a comparative/relative cost advantage
compared with other countries.
Example:
|
Production
|
France
|
Japan
|
|
|
|
|
|
Wine
|
4
|
1
|
|
|
|
|
|
Clock
|
6
|
5
|
|
|
|
|
In the case of France:-
1)Wine=(4/1)=4 times better in wine production than Japan
2)Clock=(6/5)=1.2 times better in clock production than Japan here, France
should only produce Wine
In the case of Japan:-1)Wine=(1/4)=0.25 times better in wine
production than France 2)Clock=(5/6)=0.83 times better in clock production than
France
here, Japan should only produce Clock
So, the total production will be:-France(Wine)=(4x2)=8 unit
Japan(Clock)=(5x2)=10 unit
International trade: If 1 bottle wine=2 unit clock is traded, then-
|
Production
|
France
|
Japan
|
|
|
|
|
|
Wine
|
4
|
4
|
|
|
|
|
|
Clock
|
8
|
2
|
|
|
|
|
