Answer to Question #83268 in Microeconomics for Rohit

Question

What is Ricardian Theory of Trade and Theory of comparative cost ? Are they the same?

Answer 1

Ricardian theory of trade and theory of comparative cost are the same in international trade. The theory developed by David Ricardo in response to absolute advantage theory of Smith known as the “Ricardian theory of trade or Comparative cost/advantage theory”. The core of Ricardian theory is based on the differences in production costs of same or similar commodities in different countries. According to this theory, production costs differ across the countries because of geographical division of labor and specialization in production and due to differences in climate, natural resources, geographical situation and efficiency of labor, a country can produce one commodity at a lower cost than the other.

In this way, each country specializes in the production of that commodity in which its comparative cost of production is the least. Therefore, when a country enters into trade with some other country, it will export those commodities in which its comparative production costs are less, and will import those commodities in which its comparative production costs are high. This is the basis of international trade, according to Ricardo.