Comparative Advantage

The comparative advantage was developed by David Ricardo to address the criticisms and loopholes that existed in Adam Smith's theory of absolute advantage. Comparative advantage describes a country's ability to produce a particular product at a lower opportunity cost compared to another. This theory compares the absolute advantage degree and the existence of disadvantages in the production of goods. The theory argues that even if a country can efficiently produce two given goods, it will only have the comparative advantage in the production of one. Moreover, even if a country is least or most efficient in the production of all the goods, it will benefit from the trade. Gains from trade can either be static or dynamic. Static gains are a result of specialization in trade while dynamic gains result from prolonged trade that uses existing resources and results to greater overall efficiency in commerce.

The comparative theory is based on various assumptions namely;

• The only factor of production considered is labor which is not transferable between countries.
• Only two countries and two goods are engaged in the production and consumption cycle.
• Labour supply and technological knowledge remain unchanged.
• All the units of labour involved are homogenous
• The labour cost determines the prices of the two commodities involved
• Both countries’ tastes are similar
• There is no existence of trade barriers, hence free trade
• Factors of production are only mobile within the country but not between the two countries.