In his classic explanation of the concept of comparative advantage, Ricardo
notes that both England and Portugal produce wine and cloth. Portugal, according
to Ricardo, has cheaper labor costs in the production of both commodities,
and therefore has an absolute advantage in the production of both, i.e., Portugal is
able to produce both wine and cloth in greater quantities than England. However,
Ricardo points out that in England, wine is relatively more expensive to produce,
while making cloth is relatively inexpensive. This situation then gives England a
comparative advantage in the production of cloth, and Portugal a comparative
advantage in the production of wine. It will be more economically advantageous
for each country to specialize in the commodity for which it has the comparative
advantage, and trade that commodity to the other country in exchange for the good
it does not possess an advantage in producing. Portugal should devote its economic
resources to wine production; England should commit its resources to spinning cloth.
To illustrate this using numbers, let us consider the following situation. It is
known that if Portugal devoted all its resources to producing wine it could produce
8 tons; or it could direct all resources to making cloth, which would result in 4 tons
of output. England’s economy could produce 2 tons of cloth by allocating all re-
sources to that commodity, or 2 tons of wine. The cost of making 1 ton of cloth in
Portugal is 2 tons of wine, but in England the cost of 1 ton of cloth is only 1 ton of
wine. England has a comparative advantage in the production of cloth, while Portu-
gal has the comparative advantage in the making of wine. Without specialization,
England produces 1 ton of cloth and 1 ton of wine. Portugal makes 4 tons of wine
and 2 tons of cloth. Total output of the two countries is 3 tons of cloth and 5 tons
of wine. If each specializes in producing the commodity it has a comparative advan-
tage in, however, then Portugal can make 6 tons of wine and 1 ton of cloth, while
England will spin 2 tons of cloth. Total output will now be 6 tons of wine and 3 tons
of cloth, so production of wine has increased. Moreover, England can trade 1 ton of
cloth to Portugal for 2 tons of wine, meaning that England now has 2 tons of wine to
consume, instead of the single ton it had before specialization. Portugal receives a
ton of English cloth for the wine it trades, meaning that in Portugal there will be
5 tons of wine and still 2 tons of cloth, instead of the 4 tons of wine before speciali-
zation. Both production and consumption have increased, because each country has
pursued its comparative advantage. Although in theory this simple example illus-
trates why countries trade under such conditions, the concept of comparative advan-
tage does not take into account barriers to trade, such as differences in the quality of
goods or consumer preferences, variations in exchange rates between the currencies
of the trading partners, or consideration of the fact that countries may not wish to be
wholly dependent on another for some goods (as England is for wine, in the exam-
ple above).70 Comparative Advantage