Could we still trade?

Adam Smith said that, because of the absolute advantage, a country trade with the other to fulfill their necessity with a cheaper cost. Suppose that Indonesia could produce twice in rice than the Thailand but Indonesia only a half times in wheat than the Thailand could produce. So, Indonesia will trade with Thailand in wheat because they spend less cost to buy the goods that has to produce it. But, what if Indonesia could produce rice and wheat with less cost than to trade with Thailand? Could trade still exist?

Yes, of course we could still trade. David Ricardo said that comparative advantage could make a trade possible between two countries although one of them is more productive of both goods.

	Rice	Wheat
Indonesia	50	40
Thailand	20	30

Imagine that Indonesia could produce more both in rice and wheat than Thailand. Based on Smith’s theory, it is impossible to do the trade. But, Ricardo argued that even if Indonesia could produce more but Indonesia will have greater advantage in rice than the wheat. Same with Thailand that she will have fewer disadvantages in producing wheat than rice.

This case made up a conclusion that the country that have an absolute advantage in both product should specialize in one of the most productive goods - in this case rice in Indonesia - and trade with the other who specialize in one of the fewest loss goods – wheat in Thailand.

Source: http://internationalecon.com/Trade/Tch40/T40-0.php

Gisela Bianca - 1701306070