... respectively. If both countries only produce the good they have an absolute advantage in i.e. Bulgaria produces watches and Morocco phones, then the world output increases to 600 watches and 120 phones. Thus if the countries trade under free trade laws they will both be better off since they will have more goods for the same amount of labour hours. Comparative advantage theory is a modification of the above absolute advantage theory. Ricardo analysed the trade patterns of two countries with one having an absolute advantage in both goods. This can be seen in the following example. Hours/unit England Portugal Cloth 100 90 Wine 120 80 Again if it is assumed that both countries have 6000 hours of labour and divide those equally between the two goods then the output of the two countries looks like this. Unit England Portugal Cloth 30 33 1/3 Wine 25 37 1/2 Thus the world production is 63 1/3 units of cloth and 62 1/2 units of wine. It can be seen the Portugal ...

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