Ricardian trade theory which was developed by David Ricardo revolves around specialization and comparative advantage.
According to this theory a country can produce and consume a given amount of goods.
The model assumes that there are two countries that produce two goods.
The production of the…..
Since the market is perfectly competitive, then the goods traded in the markets across different countries are homogeneous.
The goods can be moved or transported from one country to another at no cost. This implies that there are no transportation costs to be incurred in ferrying goods from one country to another.
Labor is homogenous within a given country. Therefore……..
NUMERICAL EXAMPLE OF COMPARATIVE ADVANTAGE OF TWO COUNTRIES
To illustrate this model we can take two countries country one and country two.
The two countries produces pens and spoons and use the same amount of time to manufacture or produce a unit of the two goods, a pen and a spoon.
As demonstrated in the…………
Let’s take the case of Kenya and Japan.
The two countries export industrial goods in the case of Japan and agricultural goods in the case of Kenya.
The cost of producing agricultural products such as coffee and tea is lower in Kenya due to favorable climate.
Japan has comparative advantage in………