Law of Comparative Cost Advantage

The law of comparative cost advantage was introduced by an economist called David Ricardo. The law represents an extension and improvement over that of absolute cost advantage. Ricardo argued that it is possible for a nation to have an absolute advantage of commodities over another nation. He emphasised this notwithstanding, a nation can still engage in trade by producing the commodity in which they have a comparative advantage. The principle of comparative cost advantage states that both countries will benefit if each country specialise in the production of a commodity they have a greater advantage over others.

The law of comparative cost advantage was established on the following assumptions

1. There are only two countries in the world.
2. The technology employed in production is the same in both countries.
3. The tastes of the commodities are the same.
4. There is no barrier to trade that is free mobility of factors of production.
5. The cost of production is the same.
6. No transport barrier.

Supposing we still retain Nigeria and Togo as the two countries and cotton and cocoa as the two products. Let us assume in one hour the production pattern of the commodities in the two countries is represented below

From the production pattern above, it is clear that Nigeria has an absolute advantage in the production of both cotton and cocoa over Togo while Nigeria was able to produce 100 million tonnes of cotton and 50 million tonnes of cocoa in one hour, Togo was able to produce 20millions tonnes of cocoa and 45 million tonnes of cotton. When faced with this situation Ricardo argued that trade can still take place. Though Nigeria has absolute advantages in the production of both commodities over Togo, it has a higher comparative advantage in the production of cotton than cocoa. It is observed from the production differentials in both countries in the production of the two products. Instead of Nigeria producing both commodities, it should specialize in the production of cocoa.

After Specialization

The total output of cotton as a result of specialization will increase from 100 to 200 million while 90 tonnes of cocoa will be produced. It may be argued that as a result of this cocoa has dropped from 95 million tonnes to 90 million tonnes. The fall in cocoa is only slight compared to the huge increase in cotton from 120 million tonnes when there was no trade to 200 million tonnes as a result of trade or specialization.