Comparative Advantage Theory

David Ricardo (1817) in his concept for comparative advantage theory tried to outlay the flaws of absolute advantage model and fulfill the gaps with his concept of comparative advantage theory. In his theory he discussed about countries producing commodities that they attain comparative advantage in relative to other countries. Ricardo theory is based upon opportunity cost rather than financial cost. He further stressed on comparative advantage being the way forward for a country to gain efficient goods production.

In real terms when countries specialize with concept to comparative advantage it helps increase the overall global production and leads to raise global living standards. David Ricardo critically appraised Adam Smith theory illustrating that countries should focus on producing commodities that they are better at comparing to other world countries. He was also against trade barriers and tariffs that restrict free trade in the world. He focused on advantages of comparative advantage and emphasized it to be the way forward for achieving efficient worldwide production.

Ricardo’s comparative advantage theory interprets the advantage between two countries trading wine and clothes. England and Portugal in this example, he explained that England required 100 men to produce cloth and 120 men for wine production. So, it would be in the favor of England to import wine and export cloth whereas, Portugal might utilize 80 men for wine and 90 for cloth production. Ricardo further explained that it is beneficial for Portugal to export wine in exchange for cloth with England Ricardo.

The comparative advantage as a concept in economics is among few of the rational ones. In his articles he discuss the parameters of the comparative advantage theory and identify the key point that country even with no absolute advantage in any particular sector can specialize in industry with it is least bad at it and use that commodity for trade gaining advantage.

Keywords: Comparative Advantage Theory, David Ricardo, Adam Smith