The lace that remains, beyond what the labour and capital employed on the cloth, might have fabricated at home, is the amount of the advantage which England derives from the exchange. Writing several decades after Smith in 1808, Robert Torrens articulated a preliminary definition of comparative advantage as the loss from the closing of trade:į I wish to know the extent of the advantage, which arises to England, from her giving France a hundred pounds of broadcloth, in exchange for a hundred pounds of lace, I take the quantity of lace which she has acquired by this transaction, and compare it with the quantity which she might, at the same expense of labour and capital, have acquired by manufacturing it at home. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished but only left to find out the way in which it can be employed with the greatest advantage. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry employed in a way in which we have some advantage. JSTOR ( July 2021) ( Learn how and when to remove this template message)Īdam Smith first alluded to the concept of absolute advantage as the basis for international trade in 1776, in The Wealth of Nations:.Unsourced material may be challenged and removed.įind sources: "Comparative advantage" – news Please help improve this article by adding citations to reliable sources. This section needs additional citations for verification. Widely regarded as one of the most powerful yet counter-intuitive insights in economics, Ricardo's theory implies that comparative advantage rather than absolute advantage is responsible for much of international trade.
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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 ), 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. )ĭavid 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. (The absolute advantage, comparing output per time (labor efficiency) or per quantity of input material (monetary efficiency), is generally considered more intuitive, but less accurate - as long as the opportunity costs of producing goods across countries vary, productive trade is possible. 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.
at a lower relative marginal cost prior to trade. In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e.
Lower relative opportunity cost in producing a good
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