BASIC PRINCIPLES OF THEORY OF COMPARATIVE COST

The basic principle of comparative costs in now illustrated by using a simplified trade model where

i.        There  are only two trading countries country A and B

ii.      These two countries produce only two goods cotton and sugar

iii.    The commodities produced in each country are identical

iv.    There are no barriers to trade and no transport  costs.

v.      Labor is the sole productive resources in the country and it can move freely from one industry to  another industry within the country.