Web Note 2.1: Wine and Cloth

Origins of a Theory
The principle of comparative advantage was developed by David Ricardo in 1817. You can find Ricardo's now-famous example — trading English cloth for Portuguese wine — in Chapter Seven of Principles of Political Economy. Use your 'Find in Page' function to look for "perfectly free commerce" in the Chapters 1-11 segment of the book.

Critics of an over-rigid adherence to the principle of comparative advantage also draw on Ricardo's example. They point out that this principle is static — that it depends on relative costs at a particular point in time and ignores the dynamic effects of different industries. In order to make cloth more efficiently, the English developed textile machinery. When it was no longer profitable for the English to export cloth, they could move on to export cloth-making machinery. Wine-making did not lead into other industries as easily.

Web Note 2.2: Wage Comparison

Some Data
Wages vary widely from country to country. The table, "Indexes of Hourly Compensation Costs" (Bureau of Labor Statistics), compares average wages in the manufacturing industries in a number of countries.

One difficulty that international comparisons of this sort present is that foreign exchange rates (how many Mexican pesos there are to a U.S. dollar, etc.) are not always indicative of the differences in purchasing power between those currencies. In its "Big Mac Index", The Economist compares currencies by using the McDonalds Big Mac as a standard of purchasing power.