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Home » Economics Homework Help » International Economics » Comparative Costs Doctrine
Comparative Costs Doctrine
The Ricardian doctrine of comparative costs of production was explained in terms of labour cost of production. However, the modern economy is a money economy, and in actual transactions money cost is the determining factor. International trade is, therefore, determined by absolute differences in money price rather than comparative difference in labour cost. But, as Prof. Taussig said, we can easily translate comparative differences in labour costs of commodities into absolute difference in prices without affecting the real exchange relations between commodities. For this, let us take the following illustration:

Suppose in country A:

1 day’s labour produces 20 units of wine, and

1 day’s labour produces 20 units of cloth, while in country B:

1 day’s labour produces 10 units of wine and

1 day’s labour produce 15 units of cloth.

Thus, country A has an absolute superiority in producing both the commodities but it has a comparative advantage in wine. Hence, country A will specialise in wine. Country B has comparative advantage in cloth, so it wills specialise in cloth.

In order to convert labour costs into money costs, let us takes daily wages into account which we may assume to be $ 100 in country A and $ 80 in country B thus:
                                                       
Money cost of commodities

Country Product of 1 day’s labour Daily wage  = money cost per day’s labour ($) Money cost = supply price per unit of output ($)
A 20 units of wine
20 units of cloth
100
100
5.00
5.00
B 10 units of wine
15 units of cloth
80
80
8.00
5.33

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