Question

Explain the relationship between David Ricardo ' s law of comparative advantage, free trade among nations, and international peace and prosperity. (approximately 12 sentences)

Answer 1

The Law of comparative advantage is an important theory for the nations believing in free trade with other countries. Free trade among countries means that trade without any restrictions between nations. The free trade concept fails when the nations put restrictions like tariffs and quotas on their goods.

Free trade is directly related to global prosperity and peace. This is because no one nation has all the resources to produce all that it demands. Some might have more land but less labor, or great technology but fewer people to operate and get the best out of its production. Thus no 'one' nation can be sufficient in fulfilling all its needs due to incompleteness of resources.

Through free trade, every nation can get all the goods produced even in other countries and fulfill its needs. Thus free trade is directly related to global peace and prosperity through which nations can fulfill their needs.

Now, even if one nation tries to produce everything within its borders and try to be self-sufficient it might face excessive cost in producing at least one thing. There comes the concept of absolute and comparative advantage of producing goods. Suppose there are two countries A and B and there are two goods X and Y that need to be produced. The theory of absolute advantage says that if one country has an absolute advantage in producing one good, then it should produce that good only and let the other country produce the other good in which it has an absolute advantage. (Here absolute advantage mean that one country has optimal resources in producing one good and can produce it with lower cost as compared to another country).

Now sometimes one country might have absolute advantage in producing both the goods. In that case, comes the concept of comparative advantage. According to the theory of comparative advantage when one nation has an absolute advantage in producing both the goods then it will choose to produce that good in which it has a lower opportunity cost. (Opportunity cost is the cost that needs to be foregone for getting something else in return). Thus a country will produce that good in which it has a lower opportunity cost as compared to the other good and let the other country produce the other good.