The principle justifying individuals or nations specializing in those economic activities which they perform relatively better. From its first enunciation in 1815 by TORRENS, this principle has stated that a country’s pattern of production and international trade and specialization are determined by its relative efficiency in producing goods.
This approach advances Smith’s doctrine of ABSOLUTE ADVANTAGE, which was a simple extension of his DIVISION OF LABOUR principle. Torrens and RICARDO argued that even if country A were more productive in every agricultural and industrial activity than country B, trade would still take place if internal production cost ratios were different from country to country Although this advanced international trade theory, it was later criticized for assuming constant costs, ignoring transport costs and for not determining the ratio at which exchange would take place. John Stuart MILL, with his LAW OF RECIPROCAL DEMAND, completed the theory by establishing the actual exchange rate resulting from trade.
Ricardo’s example of trade in cloth and wine between England and Portugal states that to produce a given amount of each commodity the following amounts of labour are required in each country:
England
Portugal
Cloth
100 men
90 men
Wine
120 men
80 men
Thus, England can produce cloth relatively more cheaply than wine and Portugal can produce wine more cheaply than cloth. The countries will both gain by increased specialization in the production of the good for which they have a comparative advantage, even though Portugal has an absolute advantage in the production of both commodities.
