COMPARATIVE ADVANTAGE THEORY

The mercantilist believes in trade restrictive policies which are based on maximizing export and minimizing imports

But David Ricardo theory of comparative advantage has the idea that countries should produce what they're best at relative to others

For instance England might be better than Portugal at making both wine and cloth but if england is much better at cloth and only slightly better at wine both countries benefit when England focuses on cloth and Portugal on wine which means If each country specializes in the production of goods for which they have a comparative advantage, the countries can trade with one another to achieve greater results than any could on their own.

For example

Without specialization, England can produce 1 unit of cloth and 1 unit of wine in 250 hours. On the other hand Portugal can produce 1 unit of cloth and 1 unit of wine in 250 hours.

Now, note that it is more costly for England to produce wine and also costly for Portugal to produce clothes

Therefore it makes absolute sense for Portugal to produce wine than it is for Portugal to produce clothes (Portugal has an absolute advantage in clothes production while England has absolute advantage in wine production).

In a relative sense, it is cheaper for England to produce cloth than wine and for Portugal to produce wine rather than cloth.

If they specialize in the production of these goods for which they have a comparative advantage.

With specialization, England can produce 2.5 units of cloth in 250 hours and portugal can produce 2.5 units of wine in 250 hours.

Without specialization both countries can produce 2 units of cloth and 2 units of wine in a total of 500 hours.

With specialization, both countries can produce 2.5 units of cloth and 2.5 units of wines in 500 hours. If the countries agree to trade with each other, they can both produce and consume more under the system of specialization than if they do not specialize.