The Ricardian model

David Ricardo introduced the theory of comparative advantage in his book On the Principles of Political Economy and Taxation (1817). His classic example considers an economy with only two countries (Portugal and England) and two goods (wine and cloth). Both countries can produce both goods, but their productivity in doing so differs.

Assume for simplicity that England and Portugal have the same number of workers and that within each country, they can produce either wine or cloth. For this example, if Portugal spent all its labor on wine production, it would make 1,000 bottles. If it only produced cloth, it would make 2,000 meters. England is more productive in both wine and cloth production: if it devoted all its labor to wine production, it would produce 1,250 bottles, and if it made only cloth, it would make 3,750 meters. This information is summarized in the following table:

  Production if the entire labor force produces only one good
Portugal 1,000 bottles of wine or 2,000 meters of cloth
England 1,250 bottles of wine or 3,750 meters of cloth

England is more productive than Portugal in producing both goods. It can make more bottles of wine and meters of cloth with the same number of workers, so it has an absolute advantage in both goods.