ABSTRACT
Why do relative prices and costs differ in the first place? Classical theory did not ask this question: Ricardo simply took it for granted that labor cost ratios (and hence prices) differed in the two countries before trade. In fact, Ricardo probably surprised his readers by assuming in his original example that Portugal had an absolute advantage in the production of both wine and cloth. He never bothered to explain why the British were unable to figure out how the Portuguese achieved this superior performance. Apparently, technology could be transmitted extremely well within Portugal, but it could remain a secret inaccessible to the British. Such extreme assumptions may have seemed plausible in the case of Britain and Portugal, because here were two countries with different languages, different legal systems, and different religions and cultural traditions. Ricardo explicitly encouraged that interpretation by pointing to the “financial or real insecurity of capital” in operating abroad and “the natural disinclination which every man has to quit the country of his birth and connections.”1
