A tutorial on optimisation involving the David Ricardo theory on comparative advantage Online publication date: Sun, 14-May-2023
by Tapan P. Bagchi; R.P. Mohanty; Surajit Sinha
International Journal of Industrial and Systems Engineering (IJISE), Vol. 44, No. 1, 2023
Abstract: Ricardo (1821) showed how two countries producing two different goods using a single endowed factor of production (the 2-2-1 situation), but operating with unequal efficiency, can benefit if they freely barter certain parts of their production, even if one is more efficient in producing every good. When done, such trade produces more goods in total using the same amount of total resource, rather than each producing enough goods only for own consumption, as in autarky. Ricardo showed that global benefits (measured in units of total goods produced) can accrue if each country specialises - to gain from its own comparative advantage. Simplifications of this seminal theory exist. However, even in the simplest 2-2-1 case computations become exigent when manipulated by hand to explore different scenarios of production and trade. Hence, students frequently skip this effort. This paper presents an Excel®-based computational framework to quickly locate optimal production in Ricardian trade.
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