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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
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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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Topics
Comparative Costs-Goods
Comparative Costs-Countries
Economic Integration
Customs Union Equilibrium
Customs Union Dynamic Effect
Customs Union Pure Theory
Euro-Dollar Market
Euro-Dollar-Benefits, Effects
Exchange Control Effect
Exchange Control
Exchange Control Methods
Exchange Control Procedure
Price Equalization
Intra Industry Trade Factors
Ohlin- Two Country Model
Intra-Industry Trade
Foreign Direct Investment
Industry Argument Diversification
Free Trade
Infant Industry Argument
Non-Economic Arguments
Employment Promotion Argument
Protection As Trade Policy
Protection-Developing Countries
Non-Tariff Barriers
Origin Of Gatt
Tariff Negotiations
Effects Of Quotas
Quotas Vs Tariffs
Quotas- Nature, Purpose
Import Quotas Types
Heterogeneous Markets
Internal, International Trade
International Trade Theory
International Transactions
Trade- Pure, Monetary Theory
Capital Movement Factors
Capital Movements Role
Capital Movements
International Development Ass.
International Finance Corp.
The World Bank
International Liquidity Adequacy
IMF, International Liquidity
International Liquidity
Paper Gold
Revaluation Of Gold
SDRS Salient Features
SDRS Operations
Symmetry- Monetary System
Triffins Radical Transformation
IMF Achievements
IMF Objectives, Functions
IMF Structure
Quotas
IMF Nature
Modern International Trade
International Trade Development
Product Cycle Hypothesis
Constant Factor Supply
Product Price Increase Effect
Vent-for-Surplus Approach
Foreign Trade Gains
Trade Gains Nature
Factors Determining Gain Size
Sources Of Gain
Factor Proportion Theory
Factor Proportions Assumptions
Trade Modern Theory
Factors Proportions Shortcomings
Absolute Cost Advantage
Gold Standard Mechanism
Underdevelop Comparative Costs
Comparative Costs Doctrine
Comparative Advantage Doctrine
Gold Standard Advantages
International Gold Standard
Gold Standard Game Rules
International Cartels
Price Discrimination, Dumping




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