Comparative Advantage

The theory of comparative advantage in economics states that trade between two countries can benefit both countries if each country exports the goods in which it has a relative comparative advantage. David Ricardo coined the term. The principle explains the benefits of free trade.

The example on which the principle was based is very simple. Let us assume that, given the endowment of factors of production (labor, land, climate, capital, etc.), a worker in a foreign land is able to produce one unit of cloth or one unit of wine per day, whereas in the homeland a worker is able to produce four units of [Page 382]cloth or two units of wine per day. On the face of it, the foreign land seems likely to be ...