Comparative Advantage

Comparative advantage is one of the principal ideas used in economics to explain the potential for gains from trade between countries. The theory of comparative advantage—developed by 19th-century economist Robert Torrens but usually attributed to David Ricardo—asserts that a country should focus on producing those goods it can make most efficiently while importing goods which the country can make relatively less efficiently. This is true even if one country has an absolute advantage in producing all goods in question (i.e., if it can produce all goods using fewer resources than other countries). The assumed benefits of comparative advantage are challenged from a number of perspectives, including a national security and food self-sufficiency perspective—a critique that emphasizes diminishing terms of trade, particularly for agricultural goods, and another that highlights the politics of the implementation of comparative advantage in global trade agreements.

An example will be useful in explaining how comparative advantage works: Country A and country B both manufacture steel and grow corn. They do not trade with each other, but each consumes all of their own corn and steel. Country A makes more steel and grows more corn than country B. However, country A is only marginally more efficient than country B at making steel and significantly more efficient at growing corn. In other words, the cost of growing a bushel of corn in country A is much less than in country B, but the cost of making a ton of steel is only slightly less. Country A has a greater comparative advantage in growing corn than it does in manufacturing steel. Country B has a comparative advantage in making steel relative to growing corn. Therefore, if country A puts more of its resources into growing corn, at which it is significantly more efficient than it is at manufacturing steel, and country B puts more of its resources into making steel, at which it is more efficient than it is at growing corn and only slightly less efficient than country A, between the two countries more steel will be manufactured and more corn will be grown overall. The countries can then trade, country A selling its corn to country B for [Page 88]that country's steel and vice versa. By putting more of the nation's resources into producing the good in which they hold a comparative advantage, both countries can have more of each good less expensively than they would have without trade, making both countries wealthier. According to this argument, even countries with weak economies will benefit from such trade because, by focusing on their comparative advantage, they will be using their available resources as efficiently as possible.

One major critique of comparative advantage is from a national security and self-sufficiency perspective. Such critics assert that there are some goods that a country should produce domestically to ensure access to them at all times. These may include crucial foodstuffs, military technology, or key raw materials for a nation's main industries. Even if the country produces these goods inefficiently, if a war or other event blocks trade, the well-being of a country will not be threatened by loss of access to these important items. Particularly in regard to food security, if staple goods are produced domestically, a country's basic food supply will not be threatened by price fluctuations or shortages in the world market. In terms of military security, others argue that it may not be in a country's strategic interest to trade with enemy countries, even if it would be economically beneficial to do so.

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