In economics, the theory of
comparative advantage explains why it can be beneficial for two countries to trade, even though one of them may be able to produce every kind of item more cheaply than the other. What matters is not the absolute cost of production, but rather how easily the two countries, comparatively, can produce different kinds of things.
Therefore,
comparative advantage is the opposite of Adam Smith's principle of absolute advantage: a country has an absolute advantage in the production of a good relative to another country if it can produce the good at lower cost or with higher productivity; absolute advantage is the measure of industry productivities across countries. A country has a
comparative advantage in the production of a good if it can produce that good at a lower opportunity cost, i.e. the cost (sacrifice) incurred by choosing one option over an alternative one that may be equally desired. Therefore, a country can have a
comparative advantage without having an absolute advantage.
(adapted from Suranovic, S.,
Definitions: Absolute and Comparative Advantage, International Economics Study Center, 2006, visited 2009-06-09)
Historical Background
This principle was first described by Robert Torrens in 1815 in an essay on the corn trade. In his essay, he concluded that it was to England's advantage to trade various goods with Poland in return for corn, even though it might be possible to produce that corn more cheaply in England than Poland. However, the theory of
comparative advantage is usually attributed to David Ricardo who explained it clearly in his 1817 book
The Principles of Political Economy and Taxation, using the example of the cloth industry and the wine industry of England and Portugal.
"Ricardo showed that the specialization good in each country should be that good in which the country had a
comparative advantage in production. To identify a country's
comparative advantage good requires a comparison of production costs across countries. However, 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."
(Suranovic, S.,
The Theory of Comparative Advantage - Overview, International Economics Study Center, 2007, visited 2009-06-09)
Debate
The
principle of comparative advantage is often used to justify free trade, but the theory is often quite different from the reality. A country that ceases production of a certain good will not necessarily have another one with which to replace it. Moreover, certain types of production will benefit from technological advances, while others will tend to remain more stable.
In addition, the
theory of comparative advantage seeks an immediate profitability by neglecting a long term specialization of investments. Some specialists argue that this financial specialization excludes innovation and establishes a technological dependency which gives an advantage to rich countries and consolidates inequalities.