International Political Economy

16 October 2019

Elisa Barbieri
 The principle of comparative advantage

• Remember Adam Smith;

• Already in the Wealth of Nations (1776) explained why a
tailor does not produce also his/her shoes, but buys them
from the shoemaker and similarly the farmer grows his/her
crops and buys shoes and clothes from others;
• This principle was later developed by David Ricardo (1817)
• Most argument in favour of free-trade (think about the
history of GATT and WTO) are still largely based, from an
economic point of view, on this idea
 Here is an example…

• Let us simplify: there are only two people in the world, a

farmer producing potatoes and a breeder producing meat;
• If both of them only produced for their own consumption
their diet would be very poor;
• However if they exchange parts of their production they gain
in terms of variety;
• If they could produce both but the land of the breeder was
not totally fit for potatoes (and viceversa)?
 Let us complicate the example a bit…

• If the breeder was indeed better than the farmer at producing

both items?

Minutes to produce 1 kg Quantity produced in 8

of hours

Meat Potatoes Meat Potatoes

Farmer 60 15 8 32

Breeder 20 10 24 48
 The production possibility frontier (for the
farmer)
Meat

Porduction and
consumption
without trade

Potatoes kg
 La production
The frontiera delle possibilità
possibility produttive
frontier (for the
breeder)
Meat

Porduction and
consumption
without trade

Potatoes kg
 How can this situation improve?

• Up to now the production possibility frontier is also the

consumption possibility frontier;

• Now suppose that the breeder suggests the farmer to

concentrate only on potatoes, and on the other hand the
breeder concentrates for 6 hours on the production of meat
(18 kg) and 2 hours on potatoes (12 kg) and then gives 5 kg of
meat to the farmer and asks 15 kg of potatoes in turn.

• How much consumption can each one get now?

 After Trade…
Farmer Breeder

Meat Potatoes Meat Potatoes

Production and 4 kg 16 kg 12 kg 24 kg
consumption without
trade
With trade
Production 0 kg 32 kg 18 kg 12 kg
Exchange Riceves 5 Gives 15 Gives 5 kg Riceves 15
kg kg kg
5 kg 17 kg 13 kg 27 kg
Consumption
Increase in +1 kg +1 kg +1 kg +3 kg
consumption after
trade
What happens to the production possibility
frontier for the farmer?
Meat
Consumption
with trade
Consumption
and production
without trade

Production
with trade

Potatoes kg
 E’ successo qualcosa alla frontiera delle
What happens to the production possibility
possibilità produttive?
frontier frontier?
for the breeder?
Meat
Production with
trade
Consumption
with trade

Production and
consumption
without trade

Potatoes kg
 Advantages from trade

• Production possibility frontier remains the same;

• Producers move along their frontier and specialize in one of

the two activities;

• Trade allows consuming beyond each one’s production

possibility frontier;
 Question…

• Give that the breeder is better at both activities could he/she

specialize in potatoes ? Would we get to the same results?

• You try….. The answer is no.

• Then what’s the rule for choosing?

 Reply…

• Need to think about opportunity costs;

• The breeder has an absolute advantage;

• But comparative advantage is different….the breeder has a

comparative advantage in the production of meat; the farmer
has a comparative advantage in the production of potatoes;

• The comparative advantage is the ratio between the

opportunity costs of the two producers;
 Opportunity costs and comparative advantage

Opportunity cost of 1 kg of…

Meat
Potatoes
Farmer 4 kg potatoes ¼ kg meat

Breeder 2 kg potatoes ½ kg meat

 Trade between countries
• Same principle can be applied to exchanges between countries;

• This is why generally economists tend to support free trade;

• Critiques to the concept of comparative advantage

– It is a static framework (given a countries’ endowments of K, technology etc.);

– NB. Ricardo formulated this theory under the hypothesis the capital does not
move from one country to the other;
– In a dynamic perspective, the issue is can a country build a comparative
advantage?

• Industrialisation, specialisation and production strategies