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The benefit or advantage of an economy to be able to produce a commodity at a lesser opportunity cost than other entities is referred to as comparative advantage in international trade theory
The theory of comparative advantage states that if countries specialize in producing goods where they have a lower opportunity cost – then there will be an increase in economic welfare. Note this is different to absolute advantage which looks at the monetary cost of producing a good
The theory of comparative advantage is an economic theory about the work gains from trade for individuals, firms, or nations that arise from differences in their factor endowments or technological progress. In an economic model, an agent has a comparative advantage over another in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. One does not compare the monetary costs of production or even the resource costs (labor needed per unit of output) of production. Instead, one must compare the opportunity costs of producing goods across countries. The closely related law or principle of comparative advantage holds that under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage.
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, 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. 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.
I agree with Ahmed Mohammed's stance. Thank you for the opportunity to answer!
“The theory of comparative advantages” is part of the subject “International Trade and Finance”, is very interesting and deserves more attention in this world of globalization.
David Ricardo stated a theory that other things being equal a country tends to specialize in and exports those commodities in the production of which it has maximum comparative cost advantage or minimum comparative disadvantage. Similarly the country's imports will be of goods having relatively less comparative cost advantage or greater disadvantage
Ricardo's Assumptions:
1. There are two countries and two commodities
2. There is a perfect competition both in commodity and factor market
3. Cost of production is expressed in terms of labour i.e. value of a commodity is measured in terms of labour hours/days required to produce it. Commodities are also exchanged on the basis of labour content of each good
4. Labour is the only factor of production other than natural resources
5. Labour is homogeneous i.e. identical in efficiency, in a particular country
6. Labour is perfectly mobile within a country but perfectly immobile between countries
7. There is free trade i.e. the movement of goods between countries is not hindered by any restrictions
8. Production is subject to constant returns to scale
9. There is no technological change
. Trade between two countries takes place on barter system
. Full employment exists in both countries
. There is no transport cost
The above assumptions does not hold in real world but were considered as part of theory. This theory provided the basis of international trade and its implication on economic development.
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comparative advantage theory : the theory that a country should sell to other countries those products that it produces most effectively and efficiently and buy from other countries those products it cannot produce as effectively or efficiently
Thank you for the invitation ... I would agree with Mr. Md. Fazlur Rahman and Vinod's answers... They really covered your question .. Nothing to add !
