Comparative Advantage

From International Political Economy

Comparative advantage is the economic principle that certain bodies (be them states, regions, or otherwise) are inherently better suited in producing certain goods than are others. Comparative advantage is one of the defining principles of international trade. Economic theory dictates that countries should produce that good which they are most efficient at producing. The resources contained within a given territory generally dictate what commodity or commodities that area should produce. Because a country is inefficient at producing that which is does not have sufficient resources for, it makes sense for that country to trade for those goods in which another country possesses a comparative advantage. Thus, international trade stems from countries specializing in producing a product for which they have a comparative advantage, and buying or trading for goods that they do not have a comparative advantage in from other countries. The point of trading is to create a mutually beneficial arrangement of goods exchange. Both countries will benefit from specializing in the production of a good they have a comparative advantage in and the ensuing trade.

Early theories on comparative advantage

Adam Smith, in his work The Wealth of Nations, was among the first to put in writing the theory of comparative advantage. He writes, "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage."[1]

Smith outlines the basic theory behind comparative advantage; that it makes more sense to manufacture a good which you have the necessary expertise and materials to produce than to inefficiently allocate your resources to the production of a good that some other country can produce for less overall cost.

However, comparative advantage in the present day is mostly connected with David Ricardo and his Ricardian Model of Trade which formulates a two country, two good, one factor model in an attempt to explain comparative advantage.

References

  1. Smith, Adam and Edwin Cannan. The Wealth of Nations. New York: Modern Library, 2000. Print.