Adam smith and the invisible hand (3)

in this situation,with a labor of theory of value,1 barrel of wine will exchange for 4 yards of cloth in England;on the other hand,1barrel of wine will exchange for 1 1\2 yards of cloth in portugal.these exchange ratios reflect the relative quantities of labor required to produce the goods in the countries and can be viewed as opportunity costs.these opportunity costs are commonly referred to as the price ratios in autarky;England has an absolute advantage in the production of cloth and portugal has an absolute advantage in the production of wine because less labor time is required to to produce cloth in England and wine in portugal.according to smith,these is a basis for trade because both bations are clearly better off specializing in their low-cost commodity and importing the commodity that can be produced more cheaply abroad. for purposes of illustrating the gains from trade,assume that the two countries,rather than producing each good for themselves,exchange goods at a rate of1 barrel of wine for3yards of cloth.for england this means obtaining wine in portugal for only3yards of cloth per barrel instead of4yards at home.similarly,portugal benefits from acquiring cloth for acost of only 1\3barrel of wine instead of2\3barrel of wine at home.it is important to note