Comparative Advantage

Abstract

The modern economy, and the very world as we know it today, obviously depends fundamentally on specialization and the division of labour, between individuals, firms and nations. The principle of comparative advantage, first clearly stated and proved by David Ricardo in 1817, is the fundamental analytical explanation of the source of these enormous ‘gains from trade’. Though an awareness of the benefits of specialization must go back to the dim mists of antiquity in all civilizations, it was not until Ricardo that this deepest and most beautiful result in all of economics was obtained. Though the logic applies equally to interpersonal, interfirm, and interregional trade, it was in the context of international trade that the principle of comparative advantage was discovered and has been investigated ever since.

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