PRESENTED BY :

Sunil Kunche
 INTRODUCTION
 One step further of ADAM SMITH
 Exploring what might happen when one
country has an absolute advantage in the
production of all goods
 Makes better use of resources
 Trade is a positive-sum game
 THE THEORY
According to David Ricardo’s theory of
COMPARITIVE ADVANTAGE, it makes
sense for a country to specialize in the
production of those goods that it produces
most efficiently and to buy the goods that it
produces less efficiently from other countries,
even if this means buying goods from other
countries that it could produce more
efficiently itself.
EXAMPLE
 RESOURCE REQUIRED TO PRODUCE 1
TON OF COCOA AND RICE

Countries cocoa rice

GHANA 10 13.33

SOUTH 40 20
KOREA
 PRODUCTION AND CONSUMPTION
WITHOUT TRADE
COUNTRIES COCOA RICE

GHANA 10.0 7.5

SOUTH 2.5 5.0

KOREA
TOTAL 12.5 12.5
PRODUCTION
 PRODUCTION WITH
SPECIALISATION
COUNTRIES COCOA RICE

GHANA 15.0 3.75

SOUTH 10.0 10.0

KOREA
TOTAL 15.0 13.75
PRODUCTION
CONSUMPTION AFTER GHANA TRADES
4 TONS OF COCOA FOR 4 TONS OF
SOUTH KOREAN RICE

COUNTRIES COCOA RICE

GHANA 11.0 7.75

SOUTH 4.0 6.0

KOREA
INCREASE IN CONSUMPTION AS A RESULT OF
SPECIALIZATION AND TRADE

COUNTRIES COCOA RICE

GHANA 1.0 0.25

SOUTH 1.5 1.0

KOREA
 QUALIFICATIONS AND
ASSUMPTIONS
 2 countries - 2 goods
 Assumed away transportation cost.
 Assumed away differences in the prices of
resources of different countries.
 Constant returns to scale.
 Each country has fixed stock of resources.
 Assumed away the effects of trade on
income distribution within a country.
 HIGHLIGHTS
1. Extends free trade argument
2. Efficiency of resource utilization leads to
more productivity
3. Should import even if country is more
efficient in the product’s production than
country from which it is buying
4. Look to see how much more efficient
-If only comparatively efficient, than import