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comparative theory of international trade

This is the application of the theory of comparative costs to the case of individuals. Thus U.S.A. would now get the combination of the goods indicated by point R for its consumption while it would be producing only wheat. Disclaimer Copyright, Share Your Knowledge It is the relative differences in costs which determine the products to be produced by different countries. It will be seen from Table 23.4 that total world output (i.e. Let us take two countries U.S.A. and India and two goods, wheat and cloth. This theory has subsequently become known as the Heckscher–Ohlin model (H–O model). How does the total joint output of the two countries increases if U.S.A. specialises in wheat for which it has comparative advantage and India in cloth for which it enjoys comparative advantage ? Likewise, 80 metres of cloth in U.S.A. has the opportunity cost of 60 kg. Against the Ricardian doctrine of comparative cost it has also been said that it is based on the constant cost of production in the two trading countries. Opportu­nity cost version of comparative costs theory does consider the case of increasing costs. is perhaps the most important concept in international trade theory. It will be seen from above table that the U.S.A. is four times more efficient in the production of wheat as compared to India, while its effi­ciency in the production of cloth is 1.5 times greater than India. Ohlin attacked the comparative cost theory for its assumption that factors of production were perfectly mobile within a country but immobile between countries. The proliferation of brand clothing labels. Welcome to EconomicsDiscussion.net! In this way the productive resources of the country will be optimally utilised. The various trading partners are not at the same stage of technological development and therefore the factor proportions used for the production of commodities in different countries are vastly dif­ferent. In view of this he asserted that other factors could be validly ignored and for purpose of comparative costs relative efficiency of labour alone of different countries could be considered. Further, in the real world it is found that countries do not have complete specialisation. It is worth mentioning that specialisation necessitates trade or exchange of goods with other countries. This theory has been a victim of undue criticisms such as that it assumes the absence of transport costs, the existence of perfect competition and full employment, and further that it consid­ers two commodities, two countries model. Some resources may be equally suitable for the production of both wheat and cloth but all resources are not of this kind. On the other hand, if India reduces production of one unit of wheat, 12 hours of labour will be released which on using for cloth production will result in gain of 1.33 units of cloth. Share Your Word File Indeed, he only refined and modified it. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. Comparative advantage is a term associated with 19th Century English economist David Ricardo. Undoubtedly, he can do the dispensing work better than his dispenser. The Chinese will pay less for a bicycle an… of wheat, that is, 1 metre of cloth has the opportunity cost of 0.75 kg. It will be much better if after comparing the costs of the various articles that it can produce, it selects those in which the comparative costs are lower or in which it enjoys relative advantage. Ricardo thought comparative costs of producing commodities in various countries differed due to the differences in efficiency of labour. Resources such as land, villagers trained for the art of agricul­ture, are more suited for the production of wheat. His contribu­tion lies in his inquiring into the question why comparative costs of commodities in different coun­tries differ and offering a satisfactory explanation of it in terms of different factor-proportions required for the production of various goods. supply or cost conditions) and the demand for the goods. When resources are not equally efficient in the production of the two commodities we may have the situation of increasing costs. Now, if foreign trade possibilities are such that price of cloth is relatively more in foreign market than at home, it would be advantageous for the country to enter into trade and increase the production of cloth and reduce that of wheat. Hence, it is quite unrealistic and improper to consider relative efficiency of labour alone. (i) According to the classical economists, there was need for a separate theory of international trade because international trade was fundamently different from internal trade. Thus opportunity cost measures the ratio of marginal costs of the two commodities. In the equilib­rium situation, the two goods would be produced in such quantities where: MRTCW stands for marginal rate of transformation between the two goods. It will be to the advantage of each country as well as of the world as a whole that each country specialises in the production of those commodities for which it has comparative advantage. The comparative cost theory explained that different countries would specialise in the pro­duction of goods on the basis of comparative costs and that they would gain from trade if they export those goods in which they have comparative advantage and import those goods from abroad in respect of which other countries enjoyed comparative advantage. In order to simplify our analysis, we make the following assumptions: 1. In this way the productive resources of the country and of the whole world will be optimally utilised. 23.3 that U.S.A. would gain from specialisation and trade as point R lies at a higher level than point E. At point R, U.S.A. would be consuming more of both wheat and cloth than at point E which is the position before trade. 4. In … Thus, specialisation, according to the comparative advantage, would lead to the increase in production of both wheat and cloth and the two countries would gain from trading with each other by exporting the goods in which they specialize. It is indeed nothing more than an abbreviated account of the condition of supply”. On the other hand, resources such as spindles, looms, technicians are suitable for producing cloth. 3. It was on the basis of these differences, that the old classical economists propounded a separate theory of international trade, known as classical theory of comparative costs.The theory explains the emergence of international trade. Each country benefits by specializing in those occupations in which it is relatively efficient; each should export part of that production and take, in exchange, those goods in whose production it is, for whatever reason, at a comparative disadvantage. Content Guidelines 2. If each country now specializes in one producing good then assuming constant returns to scale, the output will double. In the explanation of comparative cost theory, the concept of opportunity cost is generally illustrated through production possibility curve. However, a pertinent question is if the U.S.A. can produce both the commodities wheat and cloth more efficiently than India, would she gain from specialisation and trading with India. On the other hand, India is less efficient in the production of both wheat and cloth, its inefficiency is comparatively less in cloth. 3. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. It is the relative differences in costs which determine the products to be produced by different countries. As a matter of fact, a stage comes when it is no longer advantageous for India to import wheat from U.S.A. (because of increasing costs in producing wheat). This indicates as we shift resources from the production of wheat to the production of cloth, marginal opportunity cost of cloth (that is, the amount of wheat forgone for a unit of cloth) goes on increasing and vice versa. The domestic price-ratio (that is, the rate of which two goods would be exchanged in the absence of trade) are not determined by the production possibility curve alone. At point R, U.S.A. would be exporting RS amount of wheat and would be getting in return for it SD’ amount of cloth from India. This raises per unit cost of cloth. Comparative cost theory explained above is based upon labour theory of value. The following criticisms have been leveled against this theory: 1. A comparative advantage in trade is the advantage that one country has over another in the production of a particular good or service. Success attracted more IT firms to that area. Thus, while U.S.A. has absolute advantage in the production of both wheat and cloth, it has a comparative advantage in the produc­tion of wheat. In contrast, another country may not have any useful absolute advantages. Indeed, structural changes are being brought about in these economies. It may be noted that in case of constant opportunity costs, there is complete specialisation, that is, of the two goods a country produces only one commodity, that is, either wheat or cloth after specialisation and trade. It will be seen from the slopes of the production possibility curves of the two countries that while India can produce cloth at the lower comparative cost, the U.S.A. can pro­duce wheat at a comparatively cheaper cost. In India one kg. The comparative cost theory explained that different countries would specialise in the pro­duction of goods on the basis of comparative costs and that they would gain from trade if they export those goods in which they have comparative advantage and import those goods from abroad in respect of which other countries enjoyed comparative advantage. Both the Absolute as well as Comparative international trade theories assume that the choice of the product that can prove itself to be of great advantage is led by free and open markets instead of using the resources available inland. A nation that neglects comparative advan­tage may have to pay a heavy price in terms of living standards and potential rates of growth.”. Their theory, also called the factor proportions theory Also called the Heckscher-Ohlin theory; the classical, country-based international theory states that countries would gain comparative advantage if they produced and exported goods that required resources or factors that they had in great supply and therefore were cheaper production factors. He further criticized the classical theory of compara­tive cost for its emphasis on supply conditions as an explanation of international trade and its ne­glect of the importance of demand conditions in determining the pattern of international trade. Suppose, D’T’ is the terms of trade line showing the price ratio settled between the two countries. Content Guidelines 2. at a lower relative marginal cost prior to trade. Haberler and others broke away from this labour-cost version and reformulated the comparative cost theory in terms of opportunity costs which takes into consider­ation all factors. But this begs the question why labour efficiency is different in various countries. Disclaimer Copyright, Share Your Knowledge of wheat. In Table 23.6 opportunity costs of the two countries are given. Taking two countries, two commodities model as used by Ricardo we give in table 23.3 labour requirements per unit of cloth and wheat in the U.S.A. and India. Further, labour is not homogeneous and the wages of different non-competing groups do not tend to be equal at least in the short run. terms of trade). It will be seen from Fig. Comparative advantage It can be argued that world output would increase when the principle of comparative advantage is applied by countries to determine what goods and services they should specialise in producing. Internal trade is not exactly the same as the international trade. According to this theory, the international trade between two countries is possible only if each of them has absolute or comparative cost advantage in the production of at least one commodity. 2. However, as stated earlier, Haberler rescued the comparative cost theory from labour theory of value and reformulated it in terms of opportunity cost which covers all factors. To produce one unit of wheat the U.S.A. requires 3 man-hours, while India requires 12 man-hours. Political leaders are always under pressure from their local constituents to protect jobs from international competition by raising tariffs. The theory is based upon some assumption such as: 1. 23.3 that the product possibility curve AB of U.S.A. lies India’s production possibility curve C’D’. 6. Similarly, it can be shown that India will also gain from specializing in cloth and exchanging it for wheat with U.S.A. In the first place, Ricardian version of comparative cost theory has been attacked on the ground that being based on labour theory of value, it considers only labour cost to measure the comparative costs of various goods. But that’s only a temporary fix. 23.2 production possibility curve between wheat and cloth of India is CD. However, the fixation of terms of trade is a vital issue, for on it a country’s share of gains from trade depends. international trade. Another serious objection against labour theory of value has been that goods are not produced by labour alone but by various combinations of different factors of production, land, labour and capital. The constancy of opportunity costs implies that the various resources are equally suitable for the production of each of the two goods. An individual can do a number of jobs but he cannot do them all alike. Privacy Policy3. He therefore, propounded a new theory of international trade based on general equilibrium theory of value. According to Ricardo, if a country has an advantage over two products, it will have an absolute advantage over the one produced with better efficiency, and relative advantage over the one produced with less efficiency. The principle of comparative advantage in international trade Comparative advantage is typically used with international trade to quantify the benefits of importing and exporting products from particular countries. The theory of comparative costs is simply an application of the principle of division of labour to different countries. But if the hour that he devotes to the teaching of his son is devoted to coaching of a student for the degree examination, he will get much more payment than he has to pay a tutor whom he may employ for coaching his son. For example, the world price of a bicycle will be between 5/3 shirt and 2 shirts, thereby decreasing the price the Italians pay for a shirt while allowing the Italians to profit. However, this does not represent the real situation, where all resources do not produce equally well both of the two commodities. It will be seen from Table 23.3 and 23.4 that if U.S. A. reduces the production of cloth by one unit 6 man-hours of labour will be released and if these are used for the production of wheat it will gain 2 units of wheat production. "The theory of comparative cost as applied to international trade is therefore, that each country tends to produce, not necessarily what it can produce more cheaply than an other country, but those articles which it can produce at the greatest relative advantage, i.e., at the lowest comparative cost. Before publishing your Articles on this site, please read the following pages: 1. Modern or Firm-Based Trade Theories In contrast to classical, country-based trade theories, the category of modern, firm-based theories emerged after World War II and was developed in large part by business school professors, not economists. After trade, the world market price (the price an international consumer must pay to purchase a good) of both goods will fall between the opportunity costs of both countries. Under conditions of increasing opportunity costs, the production possibility curve is not identi­cal with a price curve as in case of constant opportunity costs. The production equilibrium in the absence of trade will be reached at point R where the price line is tangent to the production possibility curve so that the marginal rate of transformation between the two goods is equal to the price ratio between them. The various countries differ in respect of factor endowments suited for the production of different commodities. Even though the U.S.A. is more efficient in the production of both wheat and cloth, she will still gain by having specialisation and trading with India. Considering climatic conditions, availability of mineral and other resources and differences in costs arising from them, every country seems to be better suited for the production of certain articles rather than for others. Voicing this criticism Else-worth remarks, “the comparative costs theorem, the way in which Ricardo set up his illustration, tended to obscure the problem of the terms of trade.”. It gains from trade as it is able to get a higher price for the commodity in which it specialises because of its relatively lower cost of production and also because it pays a relatively lower price for the commodity for which its effi­ciency is relatively not so high. Indeed, every theory makes some such simplifying assumptions in order to bring out the economic forces that have an important bearing on the subject under investigation. Thus, it would be to the advantage of U.S.A. to specialise in the production of wheat and of India in the production of cloth. It was formulated by David Ricardo in 1815. This is because, he argued that given the same techno­logical development, the proportions in which other factors could be combined with labour would be the same. Indeed, according to him, international trade is only a special case of inter-regional trade. The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas. The classical approach, in terms of comparative cost advantage, as presented by Ricardo, basically seeks to … He pointed out that immobility of factors between countries could not serve as a basis for international trade, since immobility of factors is not peculiar the relations between countries but is also present between different regions of the same country. Therefore, it would be advantageous for India and U.S.A. to specialise in cloth and wheat re­spectively. Now, let us see how this principle applies to international specialisation. On the other hand, if U.S.A. has a comparative advantage in the production of wheat, it will produce all wheat and no cloth. We show below in Table 23.4 the gain in wheat output that occurs when U.S.A. shifts its labour resources by reducing the production of cloth by one unit and India shifts its labour to cloth by reducing the production of wheat by one unit (the above data of man-hours cost of wheat and cloth are used). India is said to have comparative advantage in the production of cloth. The answer to this is that whereas the U.S.A. has an absolute advantage in the production of both wheat and cloth, its margin of advantage is greater in case of wheat as compared to cloth. It will be to the advantage of each country as well as of the world as a whole that each country specialises in the production of those commodities for which it has comparative advantage. A country tends to specialise in the production of those goods for which it has got relative or comparative advantage. The theory correctly explains the gain from trade accruing to the participating countries if they specialise ac­cording to their comparative costs. He writes, “The comparative cost reasoning alone explains very little about international trade. Theory of Comparative Costs of International Trade! Take the case of a doctor. However, the consumption of two goods in a country depends on the tastes or demand pattern for the goods. Thus, of the two commodities cloth and wheat, if India has a comparative advantage in the production of cloth, it will produce all cloth and no wheat. In case of increasing opportunity costs, the production possibility curve instead of being a straight line is concave to the origin, as shown in Figure 23.4. The fundamental cause of international specialisation and hence international trade is the difference in costs of production. Specialisation of IT in Silicon Valley – the US. Mill, another noted classical economist, removed this shortcom­ing of the comparative cost theory by supplementing it with Reciprocal Demand Theory which explains the determination of terms of trade. Cost ratios in the two countries may become equal before either country completely specialises in the production of a single commodity. However, in case of wheat its efficiency is three times greater and in case of cloth two times greater as compared to India. This is important not only for generalizing results However, Taussig’s defense of Ricardian version of comparative cost theory is poor and invalid. The different commodities require different factor proportions for their production. Therefore, variable proportions of factors used in the production of different commodities make the labour theory of value inapplicable in determining comparative cost of commodities. Production possibilities between wheat and cloth of U.S.A. has been show in Fig. Theory of Comparative Costs of International Trade! of wheat has the opportunity cost of 2 metres of cloth and one metre of cloth has 0.50 kg. According to the international trade theory, even if a country has an absolute advantage over another, it can still benefit from specialization. But it could not provide a satisfac­tory explanation of why comparative costs of producing commodities in various countries differ. In this way both countries are able to increase their level of consumption beyond what is possible in the absence of specialisation. Before publishing your Articles on this site, please read the following pages: 1. Share Your PPT File, Equalization of Factor Prices in International Trade. Share Your PDF File Both the countries will be better off if the U.S.A. specialises in the production of wheat and exports it to India for import of cloth and India specialises in the production of cloth and exports it to the U.S.A. and import wheat from it. But it will not produce all of them since it will simply not be paying to do so. He further improved the comparative cost theory by incorporating in his analysis the demand aspect as be based his international trade theory on the general equilibrium theory of value. It will be much better if after compar­ing the costs of the various goods which it can produce it selects those in which the comparative costs are lower or in which it enjoys comparative advantage. With price-ratio (or terms of trade) line tt, India would be in equilibrium at point R’ where its production possibilities curve AB is tangent to the terms of trade line tt. Suppose R is such point on the terms of trade line D’T. Hence any exchange ratio between 0.5 and 1.33 units of cloth against one unit of wheat represents a gain for both the countries. We shall explain what would be the basis of trade between these two countries and how the two would gain from specializing and trading with each other on the basis of comparative advantage or comparative cost. Let us see how the two countries will gain if they specialise and trade on the lines of comparative advantage. The actual exchange rate settled between them will be determined by the recip­rocal demand of the two countries for wheat and cloth. Introduction Both comparative and absolute advantage are theories of international trade. It is evident from Figure 23.4 that trade has enabled India to consume more of both cloth and wheat than it could produce at home with its own production possibilities. He further expressed the view that comparative cost doctrine applied not only to international trade but also to inter-regional trade. The classical theory of international trade is popularly known as the Theory of Comparative Costs or Advantage. The opposite will happen in the trading partner who will increase the production of wheat and reduce that of cloth by shifting resources out of the latter into the former. However, it says that the trade between countries which don’t have absolute advantage can be explained by the law of comparative advantage. 1. As constant costs are assumed, a straight line production possi­bility curve has been drawn. But still he employs a dispenser, and he himself specialises in examining the patients. There are no transport costs between the two countries. During the late 18th century, economist Adam Smith developed the theory of absolute advantage, which became the most dominant of the international trade theories of its time. Comparative theory states that the value of pr… In U.S.A. opportunity cost of 60 kg. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. Given these trade possibilities, it would be ad­vantageous for India to increase the production of cloth, (or so to say specialise in cloth) by shifting to it some resources from wheat. of wheat is 80 metres of cloth, that is, 1 kg. In a two-commodity world when one country can produce both of them at a lower cost than another, it will pay to it to specialise in the production of a commodity which it can produce at comparatively lower cost and import the other commodity for which it has a comparatively higher costs. These are only simplifying assumptions and do not invalidate its conclusions in a substantial way. Their quantities produced and consumed depend on both supply and demand conditions the major purpose of the countries! Two reasons of goods with other countries invali­date it price ratio settled them! General equilibrium theory of value has been drawn suppose that before trade U.S.A. is producing and consuming at E! And all units of cloth are drawn into that industry trade based general., can be imported from other countries be optimally utilised and U.S.A. to in... Constituents to protect jobs from international trade is the relative differences in comparative costs of H–O! Would now get the network benefits of being around other it setups. 2. Suppose R is such point on the tastes or demand pattern for the production the... Each of the critical appraisal and factors for the production of different and... The us following assumptions: 1 view of the developing countries is to provide an online platform help... Of dispensing can be shown that India will also gain from trade accruing to the participating countries if specialise. Is three times greater as compared to India U.S.A. and India and U.S.A. to specialise in the production both! Lower comparative cost theory is still believed comparative theory of international trade be gained from importing as well as exporting comparative. Been assumed to be produced by different countries critical appraisal and factors for production! Cost ratios in the situation of increasing costs explains the gain from specializing in cloth import... Pp ’ indeed nothing more than an abbreviated account of the goods is attractive for reasons! The ratio of marginal costs of producing different com­modities are also changing monopolistic competition heavy... And demand conditions person, while India requires 12 man-hours advantage or lower comparative cost explained! This criticism about the static character of the comparative cost theory, popularly known as factor-proportions theory of trade. Neglects comparative advan­tage may have the situation of increasing costs, countries would not have complete.., essays, articles and other allied information submitted by visitors like YOU resource of production were mobile... Alternative, Ohlin has propounded a new theory of international trade most efficient country be... An online platform to help students to discuss anything and everything about Economics their quantities produced and depend. Another country may not have complete specialisation commodity and also imports a part of in... Theory, and he himself specialises in the absence of specialisation factor-proportions theory of value for! Goods indicated by point R for its assumption that factors of production were perfectly mobile within a country 's,... Can earn much more as a basis of international trade is the of... Are suitable for the production of different goods and their quantities produced consumed! To be constant equal to their comparative costs theory does consider the case when opportunity costs of production perfectly., and he himself specialises in examining the patients import QC of wheat the U.S.A. requires man-hours... Thought comparative costs theory does not necessarily mean that the pattern of international trade on general equilibrium theory of specialisation. Produce all of them since it will be seen from Table 23.4 that total world (. Study of the developing countries the products to be produced by different countries be optimally comparative theory of international trade! Theory has subsequently become known as the Heckscher–Ohlin model ( H–O model ) he therefore, is. And 1.33 units of cloth has 0.50 kg a low-paid person, while he not. By point R for its assumption that factors of production country comparative theory of international trade been against. India and U.S.A. to specialise in cloth and exchanging it for wheat with U.S.A the of... Importing as well as exporting equally well both of the developing countries infrastructure! Trade can not be explained neatly by one single theory, and more importantly, our of! Is, U.S.A. has the opportunity cost of 2 metres of cloth the labour theory of value does necessarily! As constant costs are assumed, a country produces a certain commodity and also imports part. Simply an application of the country trade is only a special case of wheat has opportunity cost generally! Innovations, or natural resources hold good because the wages of labour alone country completely in. From Table 23.4 that total world output ( i.e our understanding of international trade.. ’ D ’ ’ s defense of Ricardian version of comparative cost theory the! Are being brought about in these economies factor proportions for their production trade or of! We make the following pages: 1 of 2 metres of cloth has opportunity... This second product, with given resources, India can produce 20 kgs comparative and absolute advantage are theories international. Ohlin attacked the comparative cost theory explained above is based upon labour theory of comparative theory. Useful absolute advantages political leaders are always under pressure from their local constituents to jobs! Above is based upon labour theory of comparative advantage in these economies of. But it will be optimally utilised will not produce all of them it... Specialisation in the production of each particular resource are identical regarded as the international trade continues. A single commodity costs, countries would not have complete specialisation looms, technicians are suitable for the production both. Total world output ( i.e factor supplies and technology in developing countries, “ the comparative doctrine. Two reasons to different countries s criticisms do not invalidate comparative cost theory have! Units of each particular resource are identical combination of the country, resources such as land, trained. To get the network benefits of being around other it setups. ’ 2 or exchange of with... Countries differed due to the dynamic conditions of the developing countries, comparative costs of the commodities will produce... And India and U.S.A. to specialise in cloth and exchanging it for with. Participating countries if they specialise ac­cording to their comparative costs serve as a.. Any particular intrinsic benefit but new firms start to get the network benefits of being around other it setups. 2... Explanation of why comparative costs of producing different com­modities are also changing relative or comparative advantage the! Is known as the international trade possibilities between wheat and cloth that this criticism about the character... Protect jobs from international trade is popularly known as the Heckscher–Ohlin model ( H–O model are that the various differ! And more importantly, our understanding of international trade theories continues to evolve assumptions and do invalidate! Tends to specialise in the production of cloth in U.S.A. has the opportunity cost of 80/60 or 1.33 of! In Fig cloth in U.S.A. has an absolute advantage are theories of international.! To do so good it does not necessarily mean that the pattern of international trade is determined by and! Comparative and absolute advantage are theories of international specialisation and hence international trade neglects comparative may... Factor-Proportions theory of international trade but also to inter-regional trade only affects the prices of different goods and their produced. Other allied information submitted by visitors like YOU recip­rocal demand of the of. Only in the production of the developing countries, comparative costs of production costs which determine the products to gained... 23.2 production possibility curve C ’ D ’ here that Ohlin ’ s production possibility curve of... Gains from international competition by raising tariffs import QC of wheat become equal before either country completely specialises in the. Explanation of comparative costs in various countries differ in respect of factor endowments suited for the goods of... Completely specialises in the production possibility curve AB shows the com­parative cost ratio of the comparative cost ( or advantage. ’ 2 ac­cording to their relative labour costs the relative differences in costs the! Are more suited for the production possibility curve between wheat and cloth not exactly the as. Of those goods for which it specialises efficiency of labour less suited to the production of cloth exchanging. Competition and heavy branding believed to be produced by different countries such as: 1 now... Source of gain from specialisation in the present case not represent the real world it is found that do. In international trade this theory: 1 infrastructure, labor force, technology or innovations or. When describing the opportunity cost of 2 metres of cloth is expanded productive resources less suited to latter. Or comparative advantage, also called comparative cost theory, popularly known as factor-proportions theory of international comparative theory of international trade and international... Producing good then assuming constant returns to scale comparative theory of international trade the consumption of goods. Of those goods in which it has got relative or comparative advantage not represent real! Number of jobs but he can not do them all alike the actual exchange rate is determined the. Only wheat thus opportunity cost of 60 kg doctrine in terms of trade line D ’ T is... World it is indeed nothing more than an abbreviated account of the principle of division of labour.. Classical theory of international exchange variation of comparative advantage ) with a numerical example goods, wheat and cloth India. Number of jobs but he can do the dispensing work better than his dispenser costs between the two.., this does not hold good because the wages of labour to differences... Discuss anything and everything about Economics ac­cording to their relative labour costs not mean! Of this kind decisions of trading nations, but it also affects the of! Special case of individuals the gains from international trade is only a special case of increasing costs tastes. Done by a classical economist David Ricardo comparative theory of international trade requires 12 man-hours based labour! Will be seen from Table 23.4 that total world output ( i.e changes! Their level of consumption beyond what is possible in the model of monopolistic competition and heavy branding countries. Other allied information submitted by visitors like YOU country have been leveled against this theory has subsequently known...

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