The comparative advantage law is one of the most important laws of economy, as it is useful for individuals as well as for nations, as well as for revealing many serious fallacies. (…) the term is usually attributed to David Ricardo who explained it in his 1817 book “The Principles of Taxation and Political Economy”. (…)
According to David Ricardo, there is no need to rely international trade on absolute advantages. The key word here is comparative, meaning ‘relative’ and ‘not necessarily absolute’. They both can gain by trading with each other as long as their relative disadvantages in making different goods are different.
A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country; alternatively, when the relative productivity between goods is the highest
compared with another country.
For international trade, one needs to focus on the countries that produce some goods at a cheap cost. In other words, they do not have to have absolute advantage in these goods. According to the law of comparative advantage, there is still a basis for mutually beneficial trade, even if a nation is less productive in the production of both products than the other country. The first country should specialize in the manufacture and export of commodities where its absolute disadvantage is smaller and should import commodities where its absolute disadvantage is greater. (…)
The Ricardian model assumes only two countries producing two goods using just one factor of production. No capital or land or other resources are needed for production. (…) In the model, each market is assumed to be perfectly competitive. (…) Labour productivity is assumed to be fixed. (…) Full employment is assumed. (…) Also, all workers are assumed to be identical. This means that when a worker is moved from one industry to another, he or she becomes immediately as productive as every other worker who was previously employed there. Finally, the model assumes that technology differences are the only differences that exist between the countries.
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