This research examines the law of comparative advantage, the origin of which generally is traced to David Ricardo. The law of comparative advantage is described and explained, with am emphasis on Ricardo's interpretation of the concept. The responses of other early-day economists to the law of comparative advantage are reviewed, as are current day perceptions of and attitudes toward the law of comparative advantage.
The Law of Comparative Advantage, and Ricardo's Interpretation of the Law of Comparative Advantage
To understand the law of comparative advantage, it is necessary to understand the differences between absolute advantage and comparative advantage when the concepts are considered within the context of international trade. Both absolute advantage and comparative advantage apply to specific products (goods primarily when the theory of comparative advantage was first formulated; goods and services in the current day).
A state is said to have an absolute advantage over another state in relation to a specific product when the first state is able to product a specific product in the quantities desired at a lower absolute cost than absolute cost that the second state can produce the same product in the quantities desired. Absolute advantage, therefore, is a straight-forward, easily understood concept.
The concept of comparative advantage considered within the context of international trade is not concerned only with the absolute costs of production, although absolute costs are a part of the comparative advantage equation. The concept of comparative advantage also involves the concept of opportunity cort. An opportunhty cost is equal to the potential gain one could achieve from applying an asset or factor of production to the creation of one product as opposed to using the asset or factor of production to create another product.
The concept of an opportunity cost is easily understood when one considers alternati...