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proposition was initially regarded as preposterous—and
often still is by those who do not truly understand the principle.
Through his research, Ricardo demonstrated that trade
between two countries can be mutually profitable, even when
one country is more productive than the other in every commodity
that is being exchanged. Ricardo used trade between
Portugal and England as a prime example. Portugal could
produce both wheat and wine more cheaply than England,
giving Portugal an absolute cost advantage in both commodities.
Delving deeper into the economics of these two industries,
Ricardo found that one unit of wine in England cost
the same amount to produce as two units of wheat, while in
Portugal, the production cost of one unit of wine was the
same as 1.5 units of wheat.
Lost Opportunity
Even though Portugal could produce wheat more cheaply
than England, every unit of wheat it produced cost the country
the opportunity to make a higher profit by producing a
unit of wine. This is known as a lost opportunity cost.
From this perspective, Portugal had a comparative cost
advantage in the production of wine and England had a comparative
advantage in the production of wheat. Ricardo went
on to show how both countries could benefit by trading these
two products with each other, with Portugal focusing on the
production of wine and England focusing on the production
of wheat.