Paper

Running head: BALANCING BENEFITS OF COMPARATIVE ADVANTAGE 1
Balancing Benefits of Comparative Advantage between Two Countries
by Using Optimization Model
Thanakrit Vimuttikool
The University of Texas at Dallas

BALANCING BENEFITS OF COMPARATIVE ADVANTAGE 2
Abstract
The gathering of current record deficiencies in the U.S., accompanied by the corresponding
surpluses enrolled in Japan, Germany, China and other different nations, has created the marvel
known as global imbalances. The development of such imbalances has also been recently
recommended as one of the sources of the “great recession” that began in 2007. The motivation
for this paper is best understood by exploring the comparative advantage theory and applying the
theory with the optimization model to balance the benefit of the two countries. This paper
explores Ricardo’s Theory of international trade and transforms the literature into a mathematic
model of nonlinear programming. To run our model efficiently, the wide variety of data sets are
significant. The results would come from three different situations with having the same
comparative advantage; two countries totally have the absolute advantages on the different
products, two countries have the absolute advantages on the same product, and one country has
the absolute advantages on both two products. Microsoft Excel Solver has been used for
optimizing nonlinear problems for this specific model. The model is working well and gives the
result as the expectation. The intersection point of two benefit lines represents the term of trade
that equalize benefits of two countries, called critical term of trade. Furthermore, this paper
found out the relation of the critical term of trade and the dataset before trade that provide the
easiest way to calculate the critical term of trade.
Keywords: comparative advantage, Ricardo’s theory, optimization model, GRG algorithm

Maximizing Benefits of Comparative Advantage between Two Countries
by Using Optimization Model
I. Introduction
The gathering of current record deficiencies in the U.S., accompanied by the
corresponding surpluses enrolled in Japan, Germany, China and other different nations, has
created the marvel known as global imbalances. The extensive current account deficit of the U.S.
is the result of an expansive shortfall in the goods balance and a modest surplus in the service
balance (Barattieri, 2014). It is described as “probably the most complex macroeconomic issue
facing economists and policy makers” (Blanchard and Milesi-Ferretti, 2009). The development
of such imbalances has also been recently recommended as one of the sources of the “great
recession” that began in 2007 (Obstfeld and Rogoff, 2009 and Bernanke, 2009).
The motivation for this paper is best understood by exploring the comparative advantage
theory and applying the theory with the optimization model to balance the benefit of the two
countries. This paper explores Ricardo’s Theory of international trade and transforms the
literature into a mathematic model of nonlinear programming. The model is tested by several
situations based on two countries trading, and the paper gives the results of the tests after solving
by using Generalized Reduced Gradient Algorithm, or GRG algorithm, in Microsoft Office
Excel. In short, this paper applies both literature theories of international trading and
optimization theory to find the best condition of trading between two countries and two goods
based on comparative advantage assumption.
The next part, section 2, is the literature review. This section provides two theories;
absolute advantage and comparative advantage, which are used through this paper. The concept
of absolute advantage is developed by Adam Smith in 1776, and it led to the development of the

concept of comparative advantage later in 1817 by David Ricardo (International Encyclopedia of
the Social Sciences, 2007). To be able to create a model for international trading, the
assumptions of both concepts are significant.
The third section provides the explanation of optimization theory, which focuses more on
non-linear programming, and Generalized Reduced Gradient Algorithm. Non-linear
programming is used primarily in this paper. However, solving nonlinear programming is not an
easy task. This paper uses GRG algorithm, which developed by Leon S. Lasdon in 1975
(Lasdon, et al., 1978), to solve the non-linear programming model.
In the fourth section of the paper, the international trading model for maximizing and
balancing benefits of the two countries and two goods will be formed. This part explores the
concept of comparative advantage and transforms the assumption into nonlinear programming
model, which is the main key of the paper. This section also gives an explanation of the model in
detail.
The section 5 represents the results from several situations. By using the model from the
previous section and GRG algorithm, this paper demonstrates the results that can compare to
each other. The results are reviewed and used in the next section.
Finally, this paper evaluates the quantitative relevance of the results to project the
conclusion. This paper provides some discussions that will be useful on this topic. It will give
several directions for future research.
The paper is structured as follows. Section 2 contains literature review. Section 3 presents
the optimization theory and algorithm. Section 4 presents the two-country model of non-linear
programming. Section 5 presents the quantitative analysis and solves the optimization model.
Section 6 concludes with a discussion of the results and several directions for future research.

II. Literature Review
1. Absolute Advantage
Absolute advantage is the ability of a country, individual, company or region to produce a
good or service at a lower cost per unit than the cost at which any other entity produces that same
good or service (Fontinelle, 2015). The main concept of absolute advantage is generally
attributed to Adam Smith for his 1776 publication An Inquiry into the Nature and Causes of the
Wealth of Nations in which he countered mercantilist ideas Ricardo (International Encyclopedia
of the Social Sciences, 2007). Adam Smith, the classical economist who was a lead a leading
advocate of free trade on the grounds that supported the international trade of labor, founded his
concept of cost on the labor theory of value within each nation that labor is the only factor of
production and is homogeneous and the cost of a good depends exclusively on the amount of
labor required to produce it (Carbaugh, 2014). Smith’s trading concept of absolute advantage for
two-nation and two-product world explains that the international trade will be beneficial when
one nation has an absolute cost advantage in one good and another nation has an absolute cost
advantage in another good. In short, each nation benefits by specializing in the production of the
good that it produces at a lower cost than the other nation, while importing the good that it
produces at a higher cost (Carbaugh, 2014).
However, Smith argued that it was totally impossible for all nations to become rich
simultaneously by following mercantilism because it is possible for a nation to have no absolute
advantage in anything (International Encyclopedia of the Social Sciences, 2007). While there
are the possible gains from trade with absolute advantage, the gains may not be mutually
beneficial. It can be contrasted with the concept of comparative advantage which refers to the
ability to produce specific goods at a lower opportunity cost.

2. Comparative Advantage
Comparative advantage is an economic law referring to the ability of any given economic
country, individual, company or region to produce goods and services at a lower opportunity cost
than other economic entity (R., 2014). In 1817, David Ricardo published his concept that
becomes known as the theory of comparative advantage in his book On the Principles of Political
Economy and Taxation (International Encyclopedia of the Social Sciences, 2007). Like Adam
Smith, Ricardo was an advocate of free trade and an opponent of protectionism. However,
Ricardo thought that some of Smith’s analysis needed to be improved. Due to dissatisfaction
with this looseness in Smith’s theory, Ricardo developed a principle to show that mutually
beneficial trade can occur whether countries have an absolute advantage. Ricardo’s theory
became known as the principle of comparative advantage (Carbaugh, 2014). According to the
principle of comparative advantage, although a nation has no absolute cost advantage in the
production of all goods, a basis for mutually beneficial trade might still exist.
To demonstrate the principle of comparative advantage, International Economics book by
Carbaugh (2014) indicate Ricardo’s model based on the following assumptions:
1. The world consists of two nations, each using a single input to produce two
commodities.
2. In each nation, labor is the only input (the labor theory of value). Each nation has a
fixed endowment of labor and labor is fully employed and homogeneous.
3. Labor can move freely among industries within a nation but is incapable of moving
between nations.

4. The level of technology is fixed for both nations. Different nations may use different
technologies, but all firms within each nation utilize a common production method for each
commodity.
5. Costs do not vary with the level of production and are proportional to the amount of
labor used.
6. Perfect competition prevails in all markets. Because no single producer or consumer is
large enough to influence the market, all are price takers. Product quality does not vary among
nations, implying that all units of each product are identical. There is free entry to and exit from
an industry, and the price of each product equals the product’s marginal cost of production.
7. Free trade occurs between nations; that is, no government barriers to trade exist.
8. Transportation costs are zero. Consumers will thus be indifferent between domestically
produced and imported versions of a product if the domestic prices of the two products are
identical.
9. Firms make production decisions in an attempt to maximize profits, whereas
consumers maximize satisfaction through their consumption decisions.
10. There is no money illusion; when consumers make their consumption choices and
firms make their production decisions, they take into account the behavior of all prices.
11. Trade is balanced (exports must pay for imports), thus ruling out flows of money
between nations.
In conclusion, Ricardo’s concept of comparative advantage maintains that international
trade is solely due to international differences in the productivity of labor. The basic prediction
of Ricardo’s principle is that countries tend to export those goods in which their labor
productivity is relatively high (Carbaugh, 2014).

3. Quantitative Analysis of Comparative Advantage
Within the period of time and two-country world, country A can use a half of its
resources to produce 30 units of product 1 and the other half to produce 30 units of product 2. On
the other side, country B uses the same amount of its resources as country B for 20 units of
product 1 and 10 10 units of product 2. In this case, country A has the absolute advantage in
producing both products, but it has a comparative advantage in product 2 because it is relatively
better at producing them. Country A is 3 times better at producing item 2, and only 1.5 times
better at product 1. As a result, country B would be forced to produce item 1.
In the economic theory, if countries apply the principle of comparative advantage, the
combined output will be increased in comparison with the output that would be produced when
the two countries tried to become self-sufficient and allocate their own resources towards
production of both goods (Comparative advantage, n.d.). If both countries are able to produce
goods by using fewer resource, at a lower opportunity cost, they will have comparative
advantages (Comparative advantage, n.d.). For instance, when country A gives up on making
product 1 and manufactures only product 2, it will have extra 30 units of product 2 with the cost
of 30 units of product 1. For country A, the opportunity cost of making a more unit of product 2
is one unit of product 1 that is lower than the opportunity cost of making product 2 of country B,
2 units of product 1. In contrast, country B would gain 20 units of product 1 while lose 10 units
of product 2. For country B, the opportunity cost of making one more unit of product 1 is a half
unit of product 2 that is also lower than the opportunity cost of making product 1 of country A, 1
unit of product 2. In short, country A has a comparative advantage of making product 2 while
country B has a comparative advantage of making product 1.

4. Neo-Ricardian Theory
The neo-Ricardian theory is a return to the Labour Theory of Value of Ricardo, based on
Sraffa’s seminal work of 1960 which attempted to solve problems such as the formulation of a
satisfactory theory of a surplus-producing economy (Rutherford, 2013). The analysis is used to
show how the surplus produced is divided into profit, interest, and rent (Rutherford, 2013).
Prices are not explained by labor time values but by a cost of production theory, stating the
socially necessary conditions of production (Rutherford, 2013). Neo-Ricardian analysis has been
applied to specific aspects of twentieth-century capitalism, especially oligopoly.
Mainwaring stated that countries without trading may still profitably enter into trade,
providing, providing that their rates of profit differ, for this implies differences in relative prices
(1974). The theory also told that the analysis is conducted by comparing the wage-profit
frontiers appropriate to the production activities in the autarkic and trading equilibria
(Mainwaring, 1974). The gain from trade are assessed by comparing the autarky and trade
consumption-growth frontiers (Mainwaring, 1974). In conclusion, the theory showed that there
are possibilities that countries may lose from trade. However, these possibilities could be
avoided in planned economies by ensuring that the maximization of consumption at a given rate
of growth is the objective of the trade (Mainwaring, 1974).
III.Methodology
1. Optimization Theory
Optimization is an act, process, or methodology of making something as fully perfect,
functional, or effective as possible; specifically, the mathematical procedures involved in this.
Mathematical programming (MP) is an area in business analytics that finds the optimal, or most
efficient, way of using limited resources to achieve the objectives of an individual or a business

(Ragsdale, 2007). For this reason, mathematical programming is often referred to as
optimization.
An optimization problem involves three elements; decision variables, constraints, and
objective function. A decision variable is a quantity that the decision-maker controls. A
constraint is a condition of an optimization problem that the solution must satisfy. Lastly, an
objective function is an equation to be optimized given certain constraints and with variables that
need to be minimized or maximized using MP techniques. Sometimes, the functions in a model
are linear in nature that is straight lines or flat surfaces; other times, they are nonlinear that is
curved lines or curved surfaces.
a. Linear Programming
Linear Programming (LP) involves creating and solving optimization problems with
linear objective functions and linear constraints (Ragsdale, 2007). To create an optimization
problem, LP model could be used. Linear programs are problems that can be expressed in
canonical form and standard form. However, Standard form is the usual and most intuitive form
of describing a linear programming problem. It can be illustrated as below:
Maximize 1 2 1 1 2 2( , )f x x c x c x  (1)
Subject to 11 1 12 2 1a x a x b  (2)
21 1 22 2 2a x a x b  (3)
1 2, 0x x  (4)
when 1x and 2x represent the decision variables. The first equation is the objective function, and
the rest represent the constraints.
There are many algorithms that can solve LP problems; nevertheless, Simplex Method is
the simplest and well-known algorithm. It developed by George Dantzig in 1947, solves LP

problems by constructing a feasible solution at a vertex of the polytope and then walking along a
path on the edges of the polytope to vertices with non-decreasing values of the objective function
until an optimum is certainly reached (Assad and Gass 2011). Unfortunately, this paper will not
focus on this algorithm.
Other types of optimization problems involve objective functions and constraints that
cannot be modeled adequately using linear functions of the decision variables (Ragsdale, 2007).
These types of problems are called nonlinear programming (NLP) problems.
b. Nonlinear Programing
Nonlinear programming is the process of solving an optimization problem defined by a
system of equalities and inequalities, collectively termed constraints, over a set of unknown real
variables, along with an objective function to be maximized or minimized, where some of the
constraints or the objective function are nonlinear (Bertsekas, 1999). Simply put, the main
difference between an LP and NLP problem is that NLPs can have a nonlinear objective function
and/or one or more nonlinear constraints. The process of formulating an NLP problem is
virtually the same as formulating an LP problem. However, the mechanics involved in solving
NLP problems are very different (Ragsdale, 2007). A nonlinear minimization problem is an
optimization problem in the form below;
Minimize ( )f x (5)
Subject to ( ) 0ig x  for each {1,2,3,..., }i m (6)
( ) 0ih x  for each {1,2,3,..., }j p (7)
when x X and n, m, and p is positive integers. The fifth equation is the objective function, the
sixth equation represents the constraints of inequalities, and the seventh equation represents the
constraints of equalities.

Although optimization software such as Excel Solver makes this problem less
complicated, it is important to understand the algorithm that Excel Solver uses to simplify the
difficulties when solving an NLP problem.
2. Generalized Reduced Gradient Algorithm
The Generalized Reduced Gradient (GRG) algorithm handles both equality and
inequality constraints. Also, Microsoft Excel Solver uses the GRG Algorithm for optimizing
nonlinear problems. Firstly, inequality constraints are converted to equalities by the use of slack
variables. From the sixth equation above, slack variables are added to each constraint as below;
( ) 0i n ig x x   for each {1,2,3,..., }i m (8)
Then, the GRG method converts the constrained problem into an unconstrained problem.
It solves the original problem, equation (5) to (7), by solving a sequence of reduce problems. The
reduced problems are solved by a gradient method (Lasdon, et al., 1978). It is an iterative
method. Moreover, this minimization is done only approximately and may be terminated for a
variety of reasons (Lasdon, et al., 1978).
IV. Model
GRG algorithm cannot solve the problem without the nonlinear model, and making a
model is not quite easy. However, this is the challenge of this paper. This part of the paper will
transform the assumption of Ricardo’s theory into the mathematic model. As earlier section, this
paper demonstrated that nonlinear programming has three components as well as linear
programming. Therefore, this section modelizes decision variables, objective function, and
constraints for nonlinear programming.
Firstly, this paper defines the decision variable for the model. Based on two-country two-
product assumption, ijy represents the binary variable. ijy is 1 when country i produces and

export only product j , otherwise ijy is 0. The next and most important variable is x that will
represent the term of trade between two countries and two products. Also, x demonstrates one
unit of the first product can be traded for x units of the second product.
The next step is defining the objective function. When talking about benefit, the highest
benefit is certainly aimed by every party. Thus, it makes sense that the objective function should
be maximized. Furthermore, the international trade theory between two countries is the concept
of the exchange between these two countries, so maximizing the sum of the benefits of both
parties is necessary. Therefore, the objective function could be written as the equation below;
Maximize ( ) A Bf x    (9)
when i represents the benefit of country i while i can be A or B.
However, both A and B are still the function of x . Thus, A and B can be expanded
in the form of functions. Let ija be the number of the product j that are produced by country i
after trade, and ijb be the number of the product j that are produced and consumed by country i
without trade. The function A and B are shown below.
1 1 2 2( ) ( )A A A A Aa b x a b     (10)
1 1 2 2( ) ( )B B B B Ba b x a b     (11)
Although (10) and (11) are written nicely, they are not the final form of the benefit
function because every ija has related to the decision variable ijy and the value ijb . When
country A solely produces product 1 for international trade purpose, 1 1Ay  and 2 0Ay  , 1Aa
will be two times greater than 1Ab . Therefore, the relation would express as below.
2ij ij ija b y (12)

Thus, the function A and B could be rearranged below.
1 1 1 2 2 2(2 ) (2 )A A A A A A Ab y b x b y b     (13)
1 1 1 2 2 2(2 ) (2 )B B B B B B Bb y b x b y b     (14)
Now, both A and B in (9) can be substituted by (13) and (14), respectively. Therefore,
the objective function could be rewritten as below.
Maximize 1 1 1 2 2 2 1 1 1 2 2 2( ) (2 ) (2 ) (2 ) (2 )A A A A A A B B B B B Bf x b y b x b y b b y b x b y b        (15)
or Maximize 1 1 1 1 1 1 2 2 2 2 2 2( ) 2 2 2 2A A B B A B A A B B A Bf x b xy b xy b x b x b y b y b b        (16)
Last but not least, constraints are the most complicated to define because constraints
consist of many equations. Fortunately, the model in this paper does not require the great amount
of constraints. Regarding absolute and comparative advantage, both countries cannot excel the
same product. As the same time, each country can only specialize just one product. Thus, this
restriction can be written as the constraints below.
1 1 1A By y  (17)
2 2 1A By y  (18)
1 2 1A Ay y  (19)
1 2 1B By y  (20)
In practice, ijy is the decision whether yes or no. Thus, ijy should be binary. Also, the
term of trade or x cannot be negative. Therefore, the constraints of ijy and x can be illustrated
as the equation below.
ijy are binary, when ,i A B and 1,2j  (21)
0x  (22)

However, the term of trade has another limit. That limit consists of upper and lower
limits. As country A, the term of trade or x should not be lower than 2 1/A Ab b if country A
specializes product 1, and it should not be greater than 2 1/A Ab b if country A specializes product
2. On the other hand, country B who specializes product 1 will not trade if the term of trade or x
is lower 2 1/B Bb b . Also, if country B specializes product 2, this country will not be satisfied with
the term of trade or x that is greater than 2 1/B Bb b . In short, the term of trade or x variable will
lay between lower limit 2 1/A Ab b and upper limit 2 1/B Bb b if country A specializes product 1, and
country B otherwise. In contrast, the term of trade or x variable will lay between lower limit
2 1/B Bb b and upper limit 2 1/A Ab b if country A specializes product 2, and country B otherwise.
This explicit can be written as the mathematic equation below.
2 2 2 2
1 1 2 2
1 1 1 1
A B A B
A B A B
A B A B
b b b b
y y x y y
b b b b
    (23)
Until now, the model consists of variables, objective function, and constraints; however,
one more constraint has to be considered for this paper. Because this paper’s goal would like to
balance the benefits of two countries, the constraint that represents the equability between those
countries is necessary. The constraint can be simply written as below.
A B  (24)
This constraint can be applied with (13) and (14) to get another expression as below.
1 1 1 2 2 2 1 1 1 2 2 2(2 ) (2 ) (2 ) (2 )A A A A A A B B B B B Bb y b x b y b b y b x b y b       (25)
Before going to the next section, let illustrate these equations in term of value. In
practice, the equation is usually difficult to understand, especially the term of trade limitation and
the benefit equation. The data set in figure 1 below is used for demonstrating what is the result of
the equations.

Figure 1. The data sets for equations proving
Firstly, the term of trade limitation has to be explained. Putting the data set into the
equation (23) gives the result below.
1 1 2 2
20 30 20 30
30 10 30 10
A B A By y x y y    (26)
Considering the data set, country A would rather specialize product 1, and country B will
be better off specializing product 2. In short, 1Ay and 2By should equal to 1. On the other hand,
1By and 2Ay should equal to 0 because the equation (17) to (20). Therefore, the equation (26)
would be transformed into the expression below.
2
3
3
x  (27)
Next, both benefit equations, for two countries, will be provided. Plugging in the values
from data set and specialization as above into the equation (13) and (14) will give the results
below.
[2*(30)*(1) (30)] [2*(20)*(0) (20)] 30 20A x x       (28)
[2*(10)*(0) (10)] [2*(30)*(1) (30)] 10 30B x x        (29)

In this model, the term of trade will come out as the last result; however, to demonstrate
the calculation, the term of trade has to be assigned. Let use the average between 0.67 and 3 that
approximately equal to 1.83. Now, plugging the term of trade into equation (28) and (29) will
give the benefits below.
30*(1.83) 20 35A    (30)
10*(1.83) 30 11.7B     (31)
Nevertheless, country A will produce mainly on product 1, thus the result of the equation
(30) could be converted by using the term of trade. The benefit of country A in the units of
product 1 approximately equals to 19.1, as below.
35
19.1
1.83
A   (32)
On the other hand, the benefit of country B could be converted into the unit of product 1
as well as the benefit of country A. The expression below shows the benefit of country B in the
units of product 1 that approximately equals to 6.4.
11.7
6.4
1.83
B   (33)
The demonstration has proved that the complicated equations above could give the result
correctly. In the next section, this paper shows how to use these equations to find the results by
using Microsoft Excel Solver. The results would come from three different situations with
having the same comparative advantage; two countries totally have the absolute advantages on
the different products, two countries have the absolute advantages on the same product, and one
country has the absolute advantages on both two products.

V. Results
To run our model efficiently, the wide variety of data sets are significant. Thinking about
the comparative advantages, there are only three situations that can occur. Firstly, the most
normal situation is when each country has the absolute advantage of the product differently. In
this case, the result follows Adam Smith’s theory. The second case might happen when both
countries are located on almost identical geography, but not certainly the same. That means they
have the absolute advantages on the same product; however, the comparative advantages are not
the same. Lastly, one small country might have to trade with the bigger productive country. The
last case will show that one country has totally absolute advantages over the smaller country. The
data sets of the three cases that mentioned earlier are illustrated as the figure 2 below,
respectively. Importantly, all three situations have comparative advantages.
Figure 2. The data sets, shown three different situations; the absolute advantages of the different
products, the absolute advantages of the same product, and the absolute advantages belonged to
solely one country for both products.

After identifying the data sets, the next step is to put the model into Microsoft Excel. To
be precise, the equations from previous section will be put into the spreadsheet. The example of a
spreadsheet can be shown as figure 3 below.
Figure 3. The spreadsheet example of the first case data set.
On the figure 3, the red cell, F8, contains the objective function or equation (16). The cell
K6, L6, M4, and M5 represents equation (17), (18), (19), and (20), respectively. The cell C12
and C14 contain the benefit formulas in term of the unit number of the product 2 that come from
the equation (13) and (14). These two cells are equal to each other as equation (24) or (25). The
cell B8 and D8 represent the lower and upper limit of equation (23). Those blue cells, which is
mentioned previously, demonstrate the constraints. Finally, the yellow cells are decision
variables. K4, K5, L4, and L5 are ijy , while C8 is x . These variables follow the constraints (21)
and (22). Using Solver module in Microsoft Excel, the Solver parameters can be set as the figure
4 below. On “Select a Solving Method” drop-down box, GRG Nonlinear has been used.

Figure 4. The Solver Parameters window in Solver module
Putting the three data sets from figure 2 into the orange cells on figure 3 and solving the
model like figure 4 will give the results. Table 1 below contains the three results from three case
above.
Table 1 The Results of the Maximizing and Balancing Models
Country A will
specialize
Country B specialize
Term of
Trade
(Units of
Product2)
Benefit
(Units of
Product1)
Benefit
(Units of
Product2)
Total
Benefit
(Units of
Product2)data
set
Product1 Product2 Product1 Product2 A B A B
a) 1.25 14 14 17.5 17.5 35
b) 0.5 10 10 5 5 10
c) 0.8 7.5 7.5 6 6 12

Column 2 to column 6 in the table represent decision variables, such as 1Ay , 2Ay , 1By ,
2By , and x , respectively. They also represent the final feasible solution of the model. Column 7
and 8 illustrate that both countries have an equal benefit. The last column shows the objective
value of the model, the total benefit as a whole.
VI. Conclusion
The results of the three datasets support Ricardo’s theory, Labour Theory of Value. Even
though the model has the specialization as decision variables, the optimal solution still follows
Racardo’s theory. Both countries will specialization product that they have lower opportunity
cost which will give the maximize total benefit or objective function, refer to Gain of Trade.
Although this model does not give any new information to the theory, the model can be used to
find the intersection of two benefit line.
The intersection point of two benefit lines represents the term of trade that equalize
benefits of two countries. This paper will call the intersection point as critical term of trade.
When the term of trade change one country would receive more benefit, while the other country
will have less. The critical term of trade will equalize those benefits. Also, the critical term of
trade could represent the changing point that one country will benefit over another country. For
example, if country A has more benefit than country B at a term of trade that is greater than the
critical term of trade, country B will have more benefit when the term of trade is lower than the
critical term of trade. In practice, when two countries trade goods, one bigger country certainly
trades at a term of trade that favor its own benefit. Therefore, the term of trade from the model
might not be useful in that case. However, the critical term of trade could possibly provide some
information and guide the exploited country. The exploited small country can compare the
offered term of trade from the powerful country to the critical term of trade.

Furthermore, this paper found out the relation of the critical term of trade and the dataset
before trade. The critical term of trade will equal to the ratio between the total numbers of
product 1 and product 2. For instance, the first dataset has the critical term of trade equal to 1.25
which came from the ratio of 50, the total number of product 2, divided by 40, the total number
of product 1. The reason why the critical term of trade acts this way is because of free trade with
absolutely no barrier. When two countries are trade freely, the products can be consumed at any
place anytime. Also, two countries will temporarily become one greater country. Thus, the value,
term of trade, between those products can be rated as the ratio between product 1 and product 2.
However, this result might be hard to be true in practice because Ricardo’s theory does not
consider external costs such as transportation costs. The theory also assumes that markets are
perfectly competitive.
For the future purpose, this model could be applied in several ways. First, the model can
be extended to multiple-country international trade theory. Second, the result of the model can be
used for gaining more information in the future. Furthermore, the model can be applied for more
complicated researches or projects, e.g. neo-Ricradian theory and international trade theory with
diminishing returns.

References
"Absolute and Comparative Advantage". International Encyclopedia of the Social Sciences (2nd
ed.). (2007). Macmillan Reference USA. pp. 1–2.
Assad, A., & Gass, S. I. (2011). Profiles in operations research: Pioneers and innovators. New
York: Springer.
Barattieri, A. (2014). Comparative advantage, service trade, and global imbalances. Journal of
International Economics, 92(1), 1-13. doi:10.1016/j.jinteco.2013.11.004
Bernanke, B. (2009, March 10). Financial Reform to Address Systemic Risk. Retrieved August
05, 2016, from
https://www.federalreserve.gov/newsevents/speech/bernanke20090310a.htm
Bertsekas, D. P. (1999). Nonlinear programming. Belmont, MA: Athena Scientific.
Blanchard, O. J., & Milesi-Ferretti, G. M. (2009). Global Imbalances: In Midstream? SSRN
Electronic Journal SSRN Journal. doi:10.2139/ssrn.1525542
Carbaugh, R. J. (2014). International economics (15th ed.). Boston, MA: Cengage Learning.
Comparative advantage. (n.d.). Retrieved November 06, 2016, from
http://www.economicsonline.co.uk/Global_economics/Comparative_advantage.html
Fontinelle, A. (2015). Absolute Advantage. Retrieved September 12, 2016, from
http://www.investopedia.com/terms/a/absoluteadvantage.asp
Lasdon, L. S., Waren, A. D., Jain, A., & Ratner, M. (1978). Design and Testing of a Generalized
Reduced Gradient Code for Nonlinear Programming. ACM Transactions on
Mathematical Software ACM Trans. Math. Softw. TOMS, 4(1), 34-50.
doi:10.1145/355769.355773
Mainwaring, L. (1974). A NEO-RICARDIAN ANALYSIS OF INTERNATIONAL TRADE.
Kyklos, 27(3), 537.
R. (2014). Comparative Advantage. Retrieved September 12, 2016, from
http://www.investopedia.com/terms/c/comparativeadvantage.asp
Ragsdale, C. T. (2007). Spreadsheet modeling and decision analysis: A practical introduction to
management science (7th ed.). Stamford, CT: Cengage Learning.

Rogoff, Kenneth, and Maurice Obstfeld (2009). Global Imbalances and the Financial Crisis:
Products of Common Causes. Asia and the Global Financial Crisis. Asia Economic
Policy Conference, Santa Barbara, CA, October 18-20, 2009: Federal Reserve Bank of
San Francisco.
Rutherford, D. (2013). Routledge Dictionary of Economics (3). Florence, GB: Routledge.
Retrieved from http://www.ebrary.com.libproxy.utdallas.edu

Paper

Recomendados

Recomendados

Mais conteúdo relacionado

Destaque

Destaque (17)

Semelhante a Paper

Semelhante a Paper (16)

Paper