We take the example of two countries - India and Pakistan and two commodities - wheat and cloth.

Equal cost difference

1.is produced in India by 10 days of labor =100 units of cotton or 80 units of wheat

2. in Pakistan with 10 days of hard work =Generation of 80 units of cotton or 64 units of wheat,

Ricardo and other eminent economists believed in labor theory of value and considered labor only as a means of production. For comparison, we have taken 10 days of labor in both the countries and also believed that labor is equally efficient in both the countries. The difference in production is due to the difference of natural resources, other means cooperate with labor. Also we are using the opportunity cost assumption. In other words, considering the cost of production in the marks of one item of another. For example, in the above example, we have assumed that a 10-day cost of labor can produce either 100 units of cotton or 80 units of wheat in India. It can also be expressed as

100 units of cotton in India = 10 days of labor = 80 units of wheat or 100 units of cotton = 80 units of wheat or 1 unit of cotton = 0.8 units of wheat.

Hence it is clear that the opportunity cost of producing 1 unit cotton is 0.8 units of wheat which can be produced instead.

In the above example, in Pakistan also the opportunity cost is same ie 1 unit of cotton is equal to 0.8 unit of wheat.

It is explained below: 80 units cotton - 10 days labor = 64 units wheat or 80 units cotton = 64 units wheat or 1 unit cotton = 0.8 units wheat in Pakistan.

The opportunity cost of cotton and wheat in India and Pakistan is explained by the following picture. It is clear from the diagram that the AB curve is the production probability line drawn under the basis of 1 unit cotton = 0.8 unit of wheat. Since the cost ratio is the same in both countries, there is no possibility of trade in both countries. Neither India enjoys any advantage over Pakistan nor Pakistan. Therefore, the question does not arise whether India should export any goods and Pakistan should specialize in the production of other goods and exports because the cost ratio is the same in both countries.

Hence 1 unit cotton = 0.8 unit wheat.

1 unit cotton - 0.8 unit wheat in Pakistan.

According to Ricardo and other eminent economists, if the production cost ratio is the same, then trade cannot take place in two countries. But this difference in production cost ratios can be absolute or even comparable. Absolute Cost Differences in Production The following example illustrates the absolute

difference of occupancy costs.

The absolute difference of costs is explained by the following example.

India can produce 10 days of labor in =100 units of cotton or 50 units of wheat

can produce 10 days of labor in Pakistan = 50 units of cotton or 50 units of cotton or 100 units of wheat.

In this example, India has a clear advantage in the production of cotton. Because India's 10 days of labor can produce 100 units of cotton whereas it produces 50 units of cotton in Pakistan. On the other hand, Pakistan is superior to India in terms of production of wheat because 10 days of labor produces 100 units of wheat in Pakistan whereas only 50 units are produced in India. India has an advantage in cotton 4:1

so it is clear that India needs cotton Production has a 4-fold advantage over wheat production. On the other hand, Pakistan has an advantage in wheat production in 2:05 or 4: 1

Pakistan is 4 times better than cotton in wheat production. India Pakistan can produce cotton at a lower cost, and on the other hand, Pakistan can produce wheat cheaper. Hence, there is ample scope for international trade in both countries as the cost ratios of production are different.

Therefore, both countries will benefit from doing business with each other. India can specialize in cotton production as it has absolute advantage. India can import wheat from Pakistan by exporting cotton. On the other hand Pakistan can specialize in wheat in which it has absolute advantage and can import cotton from India. This will benefit both countries from trade. For example, India would be able to export 1 unit of cotton on receiving anything more than 1/2 unit of wheat. On the other hand Pakistan will be ready to give up to 2 units of wheat for import of 1 unit of cotton. Therefore, there is a considerable potential for trade in both countries.

(A) If the cost of production is the same in both countries then there will be no foreign trade and

(B) if there is absolute difference in production costs between the two countries, then there will definitely be foreign trade.

However, eminent economists thought that it is not necessary that there should be absolute difference in costs. Therefore, if there is a comparative cost difference between the production of two goods in two countries, there will be international trade.

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