Overcoming Absolute and Comparative Advantage: A Reappraisal of the Relative Cheapness of Foreign Commodities As the Basis of International Trade
21 Pages Posted: 8 Jan 2018 Last revised: 19 Nov 2018
Date Written: 2018
David Ricardo indicated in his famous numerical example in chapter 7 of the Principles that it would be advantageous to Portugal to import English cloth made by 100 men, although it could have been produced locally with the labour of only 90 Portuguese men. As the production of the cloth required less quantity of labour in Portugal, it has been commonly inferred until now that this country had a production cost advantage over England in cloth making. This inference will be proven wrong here by showing that the English cloth had a lower cost of production, in money, than the Portuguese cloth. This novel interpretation of the numerical example also reveals that Ricardo used the very same rule for specialisation as Adam Smith in the Wealth of Nations, rebutting the widespread belief that he had formulated a new law, principle or rule for international specialisation, known as comparative advantage. Thus, the popular contraposition of Smith’s absolute versus Ricardo’s comparative cost advantage has to be dismissed.
Keywords: comparative advantage, absolute cost advantage, David Ricardo, Adam Smith, classical rule for specialisation, international trade theory
JEL Classification: B12, B17, F10
Suggested Citation: Suggested Citation