Adam Smith’s Example

Absolute Advantage

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 Ricardo’s Theory of Trade
 Ricardo focused on labor productivity (or
resource productivity more generally) for
different products in different countries.
 Comparative advantage
 A country will export products that it can produce
at a low opportunity cost (in terms of other
goods that could be produced within the
country).
 A country will import products that it would
otherwise produce at a high opportunity cost.
 Basis for trade: Relative differences in labor
(resource) productivity.

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 Ricardo’s Example:
Comparative Advantage

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 Ricardo’s Example:
No-Trade Relative Prices

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 Figure 3.1 – The Gains from Trade, Shown
for Ricardo’s Constant-Cost Case

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 Absolute Advantage Does Matter
for Wage Rates

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