The basic principle of
comparative costs in now illustrated by using a simplified trade model where
i.
There are only
two trading countries country A and B
ii. These
two countries produce only two goods cotton and sugar
iii. The
commodities produced in each country are identical
iv. There
are no barriers to trade and no transport
costs.
v. Labor
is the sole productive resources in the country and it can move freely from one
industry to another industry within the
country.