Intro
classical Theory of international tendering English political economist
contributed theory of comparative
advantage his book princes of political economy and taxation. This theory of comparative
advantage also called comparative cost theory, is regarded as the classical theory of international trade.
Types
of difference in production” economists
speak about three types of cost difference
in production, there are :
1.
Absolute cost difference
2.
Equal cost
difference and
3.
Comparative
cost difference
Cost
ratios a producing wine and cloth:
portaged has advantage of lower cost of production both in
wine and cloth. However the
difference in cost, that is the
comparative advantage is greater in the production of wine than
in cloth. Even if the terms of absolute
number of days of labour Portugal has a large comparative advantage in wine,
that is, 40 labourers less than England as compared
to cloth where the difference is only
10, (40710) accordingly Portugal specializes in the
production of wine where its comparative
advantage is larger . England specializes in the production of cloth where its comparative disadvantage is lesser than in wine.
Comparative
cost benefits both participants : let us explain receding contention that comparative cost
benefits both the participants, though
one of them had clear cost advantage in both commodities to prove it, let us work out, their internal exchange ratio let us assumes the two country enter into trade at an
international exchange rate (terms of
trade) I:1
At this rate, England specializing I cloth and
exporting are unit of cloth gets are
unit of wine. At home it is
required to give 1.2
units of loath for one unit of
wine. England thus gains 0.2 of cloth
i.e wine in cheaper form Portugal
by 0.2
unit of cloth
Similarly
Portugal get are unit of cloth
against 0.59 of cloth at home
thus gaining extra cloth to get one unit of wine and Portugal gets 0.11 more of cloth for one unit of wine. Thus comparative cost theory states that each country produce and exports
those goods in which they enjoy
cost advantage and imports those good suffering cost disadvantage.