Comparative advantage

Comparative advantage in an economic model is the advantage over others in producing a particular good. A good can be produced at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade.^[1] Comparative advantage describes the economic reality of the work gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress.^[2]

David Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries engage in international trade even when one country's workers are more efficient at producing every single good than workers in other countries. He demonstrated that if two countries capable of producing two commodities engage in the free market (albeit with the assumption that the capital and labour do not move internationally^[3]), then each country will increase its overall consumption by exporting the good for which it has a comparative advantage while importing the other good, provided that there exist differences in labor productivity between both countries.^[4][5] Widely regarded as one of the most powerful^[6] yet counter-intuitive^[7] insights in economics, Ricardo's theory implies that comparative advantage rather than absolute advantage is responsible for much of international trade.