Comparative Advantage – International Trade Theories
Comparative advantage is a trade theory which was developed by David Ricardo in the 18th century. The theories builds Adam Smith’s work to show that countries can benefit from trade. Ricardo’s key insight was that two countries could both benefit from trade even if one of the countries had an absolute advantage in producing all products. The key was to compare how relatively good the countries were at producing one product versus another. Comparative advantage therefore doesn’t rest on how good a country is a producing a product, rather, how comparatively good it is.
There are two videos on this page. The first introduces as explain the concept. A simple example is included to demonstrate the principle.
The second video is a critique of the qualifications and assumptions behind the theory.