Critically examine Ricardian theory of international trade. What are the assumptions of this theory.
David Ricardo developed this international trade theory based in comparative advantage and specialization, two concepts that broke with mercantilism that until then was the ruling economic doctrine. He introduced this theory for the first time in his book “On the Principles of Political Economy and Taxation”, 1817, using a simple numerical example concerning the trade between Portugal and the England in the following way:
Let’s say the labour costs per unit of cloth (C) and wine (W) produced by England (E) and Portugal (P) are as those seen in the adjacent figure. Even though Portugal has an absolute advantage on wine and cloth production, England has a comparative advantage on cloth production.
Because of this advantage, both countries would benefit from international trade. Without international trade, each country would only be able to produce (and therefore to consume) any amount of both wine and cloth inside or at the country’s production-possibility frontier (green for England and red for Portugal). For instance, point E cannot be reached by any of these
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