Is Comparative Cost Doctrine Applied to More than Two Countries?

The original version of Ricardian model was concerned with two countries. But, it can be easily extended to more than two countries. If trade of one country with all the other countries together is termed as trade with the rest of the world, then the reasoning applicable to a two-country model can easily be applied to the multi-country model.

The gist of the comparative advantage principle in this context is that: trade occurs between many countries on account of differences in comparative costs of producing various goods; thus, each country tends to export those goods in which it has a comparative advantage in costs and import those having a comparative disadvantage or less advantage. Indeed, the specific goods that are exported and imported by a country can be known only by considering the reciprocal demand of the countries for the products of each other, along with the cost-data.

To illustrate the point, a hypothetical example may be considered in 2 x 3 matrix as under: Table 3.2 represents cost-data of three countries, I, II, and III, each producing two commodities, A and B, in the absence of trade. From the given cost-data, we find:

That means, country I has a comparative advantage in producing commodity B and country in commodity A. Further, country I has comparative advantage in B over country III also. Similar country II has a comparative advantage in A over country III also. These means, according to doctrine of comparative costs advantage, country I should specialise in B, and country II in A. position of country III is, however, typical.

Thus, country III has a comparative advantage in the production of A over country I and in production of B over country II.

Hence, the specialisation of country III cannot be determined unless the terms of trade between | A and B are known. This, however, depends upon the reciprocal demands for the goods of all three countries.

If, however, the terms of trade between A and B are:

1 Unit of A = Between 2 and 3 units of B.

Then, country III will specialise in producing good A together with country II and export it to country I, and import commodity B from country I.

If, however, the ratio of exchange is:

1 Unit of A = Between 3 and 4 units of B
then, country III will specialise in producing good B and export it to country II and import commodity A from country II.

In case of exchange ratio being 1 unit of A = 3 units of B, country III will not enter into any trade with any of these countries (I or II) as it can produce both goods domestically at the same cost. With a particular intermediate position as such, country III will be excluded from international trade.

Thus, the exact pattern of specialisation and trade between more than two countries depends on the terms of trade, which in turn, depend on the relative strength of international demand.

According to Professor Samuelson, in a multi-country-multi-commodity trade model, trade along comparative cost lines is not only possible, as explained above, but is most convenient too. This point is further exposed with the help of Figure 3.1.

The above diagram represents four countries and four commodities. The arrows indicate the direction of exports of each country. It can be seen that country I exports A to country II; country II exports B to country III; country III exports C to country IV; and country IV exports D to country I. Of course, here trade is considered as only a one-way affair. Country I exports A to country II but does not import anything from it and country II exports B to country III and so on.

It thus, implies that country II pays country I for its import through export earnings from country III, similarly country III pays country II via country IV, country IV pays country III via country I, country I pays country IV through its export yields from country II. It is, however, assumed that trade condition is such that there is a balanced equilibrium, whereby, for all the participating countries, their aggregate values of exports and imports are equal.