Let us illustrate the fundamental principles of international trade by considering America and Europe of a century ago. If labor is absolutely more productive in America than in Europe, does this mean that America will import nothing? And is it economically wise for Europe to protect its market tariffs or quotas?
The English economist David Ricardo, who showed that international specialization benefits a nation, first answered these questions in 1817. He called this result the law of comparative advantage.
For simplicity Ricardo worked with only two regions and only two goods, and he chose to measure all production costs in terms of labor hours. We will follow his lead here, analyzing food and clothing for Europe and America.
In America, it takes 1 hour of labor to produce a unit of food, while a unit of clothing requires 2 hours of labor. In Europe the cost is 3 hours of labor for food and 4 hours of labor for clothing. We see that America has absolute advantage in both goods, for it can produce them with greater absolute efficiency than can Europe.
The English economist David Ricardo, who showed that international specialization benefits a nation, first answered these questions in 1817. He called this result the law of comparative advantage.
For simplicity Ricardo worked with only two regions and only two goods, and he chose to measure all production costs in terms of labor hours. We will follow his lead here, analyzing food and clothing for Europe and America.
In America, it takes 1 hour of labor to produce a unit of food, while a unit of clothing requires 2 hours of labor. In Europe the cost is 3 hours of labor for food and 4 hours of labor for clothing. We see that America has absolute advantage in both goods, for it can produce them with greater absolute efficiency than can Europe.
