Introduction:

David Ricardo a British economist of 19th century analyzed the causes for and the benefit of international trade in terms of comparative cost. David Ricardo agreed with the analyses of Adam Smith that international trade would be mutually advantages of one country has absolutely advantage over another country in one commodity and the other country has an absolute advantage over the first country in other commodity. His comparative cost theory is the milestone in international theories.

He went further and pointed out that any two countries could very well gain by trading even if one of the countries is having an absolute advantage in both products over the other country provide the extent of absolute advantage is different in the two commodities in question, that is the comparative advantage is greater in respect of one commodity than in respect of other commodity.

Comparative cost theory:

The theory of comparative cost of Ricardo can be explained with an example, suppose in country A five units of labor produce 1 unit of product X and 10 units of labor produce 1 unit of product Y, and in country B 20 units of labor produce 1 unit of product X and 15 units of labor produce 1 unit of product Y. In this case country A can produce both products X and Y at lower cost than country B. But in country A the comparative cost advantage is higher in the production of product X than in the production product Y and in country B the comparative post advantage is lower in the production of product Y than in the production of X.

In the given example the opportunity cost of product X and product Y in country A and country B will be as follows.

From the opportunity cost of the product it is clear that country A has comparative advantage in producing product X and country B has comparative advantage in producing product Y so country A can specialized in the production of product X and country B can specialized in the production of product Y and can gain from trading.

Assumptions:

• There are only two countries A and B. there will be a only two commodities say X and Y
• There is the existence of the barter system under which one commodity will be exchanged for the other commodity.
• Labor is regarded as the only factor of production.
• All labor units all over the world are homogeneous
• The supply of labor is unchangeable.
• No transport costs are involved in carrying on trade between the two countries.
• Tastes are similar in both the country.
• There is a free trade between the two countries.
• Technology knowledge is unchangeable.
• The product cost will be constant.

also read: explain the features of international trade.