Ricardo explained the reason for International trade in the early 19th century with his theory of competitive advantage. In this theory he showed how two countries could trade in two products so that both had a real economic gain. He used the production of wine and cloth to illustrate his theory, both were commodities for which there were markets in England and Portugal and both countries had domestic producers. The labour hours required for the production of a unit of each commodity is shown in the table below.

The table shows that Portugal has an absolute advantage in the production of both wine and cloth as it uses less labour in both their production. Portugal's comparative advantage in the production of wine is 80:120, which is greater than 90:100 of cloth. Were Portugal to focus its resources on wine production for every yard of cloth it ceases to produce it would produce a further 1? gallons of wine.

Ricardo postulated that the exchange rate between wine and cloth after trade was 1:1, Portugal could therefore exchange this 1? gallons of wine for 1? yards of cloth, this means that Portugal has a net gain. By establishing international trade Portugal can produce 1? yards of cloth for 90 hours labour.

Equally England gains, because it can now translate the time taken to produce I gallon of wine into the production of 1? yards of cloth, which in turn it can trade for 1? gallons of wine.

Therefore international trade fulfils the basic economic rule of effective and efficient use of resources. In the case above if Portugal only exports wine the value of exports is increased by 12.5% and the value of England's exports is increased by 20% if it only exports cloth.

It also offers participants the opportunity to specialise their production this can also offer greater productivity and expertise in related areas.

Consider the following questions:-

1. What if any are the weaknesses of Ricardo's model?
2. In the case above what related businesses or industries have developed to support the export of goods from England and Portugal?

How does this change our view of Ricardo's theory?