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Instead, one must compare the opportunity costs of producing goods across countries. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. I wish to know the extent of the advantage, which arises to England, from her giving France a hundred pounds of broad cloth, in exchange for a hundred pounds of lace, I take the quantity of lace which she has acquired by this transaction, and compare it with the quantity which she might, at the same expense of labour and capital, have acquired by manufacturing it at home. The lace that remains, beyond what the labour and capital employed on the cloth, might have fabricated at home, is the amount of the advantage which England derives from the exchange.
However, the relative costs of producing those two goods differ between the countries. In the absence of trade, England requires 220 hours of work to both produce and consume one unit each of cloth and wine while Portugal requires 170 hours of work to produce and consume the same quantities. England is more efficient at producing cloth than wine, and Portugal is more efficient at producing wine than cloth. So, if each country specializes in the good for which it has a comparative advantage, then the global production of both goods increases, for England can spend 220 labor hours to produce 2. 2 units of cloth while Portugal can spend 170 hours to produce 2. Portugal’s wine, then both countries can consume at least a unit each of cloth and wine, with 0 to 0. 2 units of cloth and 0 to 0.
125 units of wine remaining in each respective country to be consumed or exported. The earliest test of Ricardian model was performed by G. In Ricardian model, trade patterns depend on productivity differences. The following is a typical modern interpretation of the classical Ricardian model. In the interest of simplicity, it uses notation and definitions, such as opportunity cost, unavailable to Ricardo.
The world economy consists of two countries, Home and Foreign, which produce wine and cloth. We don’t know if Home is more productive than Foreign in making cloth. Similarly, we don’t know if Home has an absolute advantage in wine. In the absence of trade, the relative price of cloth and wine in each country is determined solely by the relative labor cost of the goods.