The first discussion of comparative advantage appears in On the Principles of Political Economy and Taxation, a
Question:
The first discussion of comparative advantage appears in On the Principles of Political Economy and Taxation, a book written by the British economist David Ricardo in 1817. Ricardo provided a famous example of the gains from trade, using wine and cloth production in Portugal and England. The following table is adapted from Ricardo’s example, with cloth measured in sheets and wine measured in kegs:
a. Explain which country has an absolute advantage in the production of each good.
b. Explain which country has a comparative advantage in the production of each good.
c. Suppose that Portugal and England currently do not trade with each other. Each country has 1,000 workers, so each has 1,000 years of labor time to use in producing cloth and wine, and the countries are currently producing the amounts of each good shown in the following table:
Show that Portugal and England can both gain from trade. Assume that the terms of trade are that one sheet of cloth can be traded for one keg of wine.
Step by Step Answer:
Step 1 Review the chapter material This problem is about absolute and comparative advantage and the gains from trade so you may want to review the sec...View the full answer
