The first discussion of comparative advantage appears in
On the Principles of Political Economy and Taxation, a book written
by the British economist David Ricardo in 1817. Ricardo
provided a famous example of the gains from trade, using
wine and cloth production in Portugal and England. The following
table is adapted from Ricardo’s example, with cloth
measured in sheets and wine measured in kegs:
a. Explain which country has an absolute advantage
in the production of each good.
b. Explain which country has a comparative advantage
in the production of each good.
c. Suppose that Portugal and England currently do
not trade with each other. Each country has 1,000
workers, so each has 1,000 years of labor time to
use in producing cloth and wine, and the countries
are currently producing the amounts of each good
shown in the following table:
Show that Portugal and England can both gain from trade.
Assume that the terms of trade are that one sheet of cloth
can be traded for one keg of wine.