Comparative advantage
Theory of Comparative Advantage
• proposed by Ricardo
• countries should specialize in producing those goods of which they are relatively
more efficient producers
• these countries should then trade with the rest of the world to obtain needed commodities
• if countries do specialize this way, total world production will be greater
Theory of Comparative Advantage
• Suppose that this is the marginal
cost data for Tajikistan and
Kirgizstan for the production of
wine and cloth
Marginal Costs
Wine
Tajikistan
8
Kirgizstan
2
Cloth
4
2
Theory of Comparative Advantage
• In Ricardo’s analysis, marginal costs were assumed to be constant
• If we let total resource costs be fixed for each country at 100, the
production possibility frontier for Tajikistan is
8W + 4C = 100
and for Kirgizstan it is
2W + 2C = 100
Theory of Comparative Advantage
• The RPTs (relative marginal cost) differ between these countries:
dC
RPT (Tajikista n)  
2
dW
dC
RPT (Kirgizsta n)  
1
dW
Theory of Comparative Advantage
• Although Kirgizstan has an absolute advantage in the production of both
goods, both countries could benefit from trade
• wine is relatively less costly in Kirgizstan
• Kirgizstan has a comparative advantage in wine
• cloth is relatively less costly in Tajikistan
• Tajikistan has a comparative advantage in cloth
Theory of Comparative Advantage
• Suppose that, prior to trade, each country devotes half its resources to
each good
• For Tajikistan:
W = 50/8 = 6.25
C = 50/4 = 12.5
• For Kirgizstan:
W = 50/2 = 25
C = 50/2 = 25
Theory of Comparative Advantage
• World output can be increased if Tajikistan was to produce less wine
and more cloth and Kirgizstan was to produce more wine and less cloth
• Suppose that Tajikistan decided to devote all of its resources to the
production of cloth
W = 0/8 = 0
C = 100/4 = 25
Theory of Comparative Advantage
• Suppose that Kirgizstan decided to devote 70% of its resources to the
production of wine, with the remaining 30% used to produce cloth
W = 70/2 = 35
C = 30/2 = 15
• World output of wine has increased from 31.25 to 35, and cloth output
has risen from 37.5 to 40