ABSTRACT
International trade is known to be beneficial to countries that specialize in activities, in which they have comparative advantage. The principle of comparative advantage, which was first rigorously analyzed by Ricardo, is one of the most fundamental ones in economics. It states that even if a country is less productive in all activities than other countries, it can nevertheless gain from trading with these countries, provided that it specializes in those activities in which it is relatively more productive. The greater relative productivity is measurable as opportunity cost, which poses no conceptual problems as long as we analyze the simple case of two activities, two countries and a single factor of production, as Ricardo did in his famous demonstration of comparative advantage. To recall, let the two goods, food (F) and clothing (C), be produced in both, the Home country (H) and a foreign country (F). We assume for simplicity that only one factor of production, labour, is used and that the following amounts of labour per unit of output (LF and Ld are required:
Food Clothing
Home 5 10
Foreign 6 18
The opportunity cost of clothing in terms of food equals the factor input ratio, LclLF' which is two in Home and three in Foreign. Therefore, producers in Home have comparative advantage in clothing and producers in Foreign have comparative advantage in Food. This is true in spite of Home's absolute advantage in both products as its workers are more productive (lower labour requirements) in both products than the workers in Foreign.
