Origins of The Theory
Comparative advantage was first described by David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal. In Portugal it is possible to produce both wine and cloth with less labor than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other.
Read more about this topic: Comparative Advantage
Famous quotes containing the words origins of, origins and/or theory:
“Grown onto every inch of plate, except
Where the hinges let it move, were living things,
Barnacles, mussels, water weedsand one
Blue bit of polished glass, glued there by time:
The origins of art.”
—Howard Moss (b. 1922)
“The settlement of America had its origins in the unsettlement of Europe. America came into existence when the European was already so distant from the ancient ideas and ways of his birthplace that the whole span of the Atlantic did not widen the gulf.”
—Lewis Mumford (18951990)
“OsteopathOne who argues that all human ills are caused by the pressure of hard bone upon soft tissue. The proof of his theory is to be found in the heads of those who believe it.”
—H.L. (Henry Lewis)