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*
*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 .
*

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Classical Theory of Comparative Advantage

  • 1. *
  • 2.
  • 3. *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
  • 4. 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.
  • 5. *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 .
  • 6.
  • 7. * * 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.
  • 8. * 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.
  • 10. * *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.
  • 11. * 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
  • 12. 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 .
  • 13.
  • 14.
  • 15.
  • 16.
  • 17. *