Question

Please help me to figure it out, thanks

10. Consider the following argument: "If your country can produce every good more efficiently than another country, there is no point in engaging in trade with the other country." In the context of the Ricardian model of trade, is this argument convincing? If it is, explain why. If not, explain why not

Answer 1

No, it is not convincing because the Ricardian trade theory is based on the principle of comparative advantage and specilization.

The principle of Comparative Advantage states that a country will produce the goods which it can produce most efficiently. The country will have lower opportunity cost in the production of those goods. The country will export those goods which have a lower opportunity cost, i.e. in which it has comparative advantage) and import those goods which have a higher opportunity cost.

Example,

	Hours needed to produce one bag of rice and wheat
	Mexico	Bangladesh
One bag of rice	10	5
One unit of wheat	20	4

For every one bag of rice Mexico has to give up 2 bags of wheat. This is the opportunity cost of rice, which is 2 (20/10). Bangladesh has to give up 4/5 bag of wheat to grow one bag of rice. Bangladesh has lower opportunity cost in growing rice. Bangladesh will produce and export rice.

Mexico will export wheat since it has a lower opportunity cost of producing wheat.