Comparative Advantage Gains from Trade

It is important to not confuse the terms "comparative" and "competitive" as they apply to the goals and ideals of world trade. Kennedy and Koelim (1996) find that "despite this wide acceptance in the professional community, the basics of international trade are still poorly understood by many policy makers and casual commentators" (1). The "comparative advantage" theory has been a part of international economic studies since it was created by David Ricardo, an economist who lived in the 17th century.

Ricardo's theory was that each nation has good points and bad points in its economy. In the classic example of two countries, Ricardo sets up a model where Germany and France only have two products -- beer and cheese. Kennedy and Koelim (1996) argue that "the resources in each country are finite, implying that each can produce only a limited amount of goods. Increasing production of one good means reducing production of the other. Each country can produce either good, but Germany is more efficient brewing beer than France and France is more efficient at making cheese than Germany" (1).

A. Isolationism or autarky, wherein they both try to maintain their own production quotas which would result in expensive domestic beer in France and expensive domestic cheese in Germany.

B. Competitive intercountry trade, wherein Germany would try to force both its beer and cheese on France, a