ld produce and export those goods and services for which it is relatively more productive than are other countries and import those goods and services for which other countries are relatively more productive than it is (Mahoney, Trigg, Griffin, & Pustay, 1998). David Ricardo, the early nineteenth-century British economist solved the problem of the theory of absolute advantage, by developing the theory of comparative advantage. Absolute advantage suggests that no trade would occur if one country has an absolute advantage over both products. The differences between absolute and comparative advantage theories are subtle. Absolute advantage looks at absolute productivity differences, comparative advantage looks at relative productivity differences (Mahoney, Trigg, Griffin, & Pustay, 1998).Take Australia, and Japan again as examples, this time Australia is better than Japan at producing both products computers and wine, and only one factor of production, labour. Australia produces 6 computers for every 4 bottles of wine, and Japan produces 5 computers for every 1 bottle of wine. Absolute advantage suggests that no trade should occur, because Australia is more productive than Japan in producing both goods. The theory of comparative advantage, suggests that trade should still occur, as Australia is comparatively better than Japan in wine production, whereas Japan is comparatively better than Australia in the production of computers (Gandolfo, 1998).Economists use the term comparative advantage when describing the opportunity cost of two producers. The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good (Gans, King, & Mankiw, 1999).The Heckscher-Ohlin Theory of Factor Endowment It has been previously stated that the difference in relative commodity prices between two nations is evidence of their comparative advantage and forms the basis for mutually beneficial trade. F...
