Source link: http://archive.mises.org/627/the-case-of-portugal-and-england/
The case of Portugal and England
the following: “…In the famous example, although Portugal can produce both cloth and wine more cheaply than can England, the opportunity cost of cloth in terms of wine is favorable to Portugal specializing in wine. In England the internal cost ratio favors England’s production of cloth. It is the differing internal opportunity costs of one good in terms of another that results in total output increasing under specialization. Note however, that, as it is cheaper to produce cloth and wine in Portugal, if English factors of production are internationally mobile, it pays English capitalists to move factors of production to Portugal and produce both goods there. There would be an international redistribution of income and wealth from England to Portugal….”
Since we are talking here about a two good and a two country world, what is being claimed is that ALL capital will flow to a country that has an absolute advantage in the production of ALL goods.
What is being overlooked is that any capital that is invested in Portugal, whether in the form of cash or factors of production, to produce either cloth or wine beyond the amounts that Portugal itself consumes, will be entirely wasted unless the surplus production can be exported to England. But this will be impossible if no capital is invested in England and England has no surplus production of its own to pay for the imports. Even if the capitalists take back the surplus production themselves, they will not find an English market that can pay for it since there has been no domestic investment.
Advantages in unit productivity itself are not enough, as there must be markets willing to and capable of disposing of the surplus production. It may well be that the most significant function that America serves in the global economy is that of able consumer, possibly overshadowing its many comparative advantages in production.
Posted by Don Lloyd