Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

12.2.2 Comparative Cost Advantage:
The next explanation of trade was provided by David 
Ricardo. Starting from Smith he went on to show that in order to 
participate in trade it is not necessary to have absolute advantage 
in one commodity. One country can be more efficient than the other 
in production of both the commodities and yet trade can start. The 
logic is very simple. A country may be more efficient in general but 
degree of efficiency differs as between two commodities. To 
illustrate the point let us suppose that Mr. X is a better badminton 
player than Mr. Y. At the same time he is very good in playing cards 
and his skill in cards is greater than his skill in badminton. In this 
case one can say that Mr. X has comparative advantage in cards 
over Mr. Y. This idea of comparative advantage in production is 
shown in the following table. 
Labour is taken to be the only factor of production and the 
figures show output of one hour's labour. One hour of labour time in 
the U.S.A. gives 40 bottles of wine and 50 yards of cloth while one 
hour labour time in the U.K. yields 20 bottles of wine and 10 yards 
of cloth. U.S.A. is by far the better producer of the two and 
according to Adam Smith there is no point in trading. Ricardo, 
however would maintain that U.S.A. has a comparative advantage 
in cloth (one hour's output is five times that of the U.K.) and so the 
country would do well to export cloth. U.K. on the other hand would 
concentrate in wine and export it to the U.S.A. When U.S.A. is 
expanding production of cloth she will have to draw labour from 
wine. Under the pressure of international demand U.S.A. will go on 
increasing production of cloth at the cost of wine. Gradually a stage 
will be reached where all available labour will be employed in cloth 
and wine production will cease altogether. This is the state of 
complete specialization following trade. In the U.K. the opposite 
tendency will be there which means all available labour will tend to 
be employed in favour of wine. Again this is complete specialization 
for the U.K. 
When such shifting of labour from one industry to the other is 
taking place and greater specialization results, the question is what 
happens to world production. One hour's labour time withdrawn 
from wine production in the U.S.A. means decline of output by 40 
units. This much of additional labour time in the case of cloth 
increases output by 50 units. In U.K. one hour's labour time taken 
from cloth means decline of output by 10 units. The same amount 
of labour time given to wine means output increases by 20 units. In 

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aggregate wine output increases by -10 + 20 = 10 Cloth output 
changes by +50 -10 = +40. So world as a whole is better off 
compared to pre trade position. 
In the presence of trade complete specialization in 
production is a distinct possibility which means that each country 
ends up being a single commodity producer. The only exception will 
arise if one country is too small and cannot cope with total 
international demand. In that case