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{{Short description|Lower relative opportunity cost in producing a good}}Comparative advantage in an economic model is the advantage over others in producing a particular good. A good can be produced at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade.WEB,www.bls.gov/bls/glossary.htm, BLS Information, February 28, 2008, Glossary, U.S. Bureau of Labor Statistics Division of Information Services, 2009-05-05, Comparative advantage describes the economic reality of the work gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress.BOOK, Maneschi, Andrea, Comparative Advantage in International Trade: A Historical Perspective, 1998, Elgar, 1, David Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries engage in international trade even when one country’s workers are more efficient at producing every single good than workers in other countries. He demonstrated that if two countries capable of producing two commodities engage in the free market (albeit with the assumption that the capital and labour do not move internationallyBOOK, Schumacher, Reinhard, Free Trade and Absolute and Comparative Advantage: A Critical Comparison of Two Major Theories of International Trade, 2012, Universitätsverlag Potsdam, 9783869561950, 51–52, Neoclassical and modern theories maintain the difference between domestic and international trade. They retain the assumption that both labour and capital do not move internationally., ), then each country will increase its overall consumption by exporting the good for which it has a comparative advantage while importing the other good, provided that there exist differences in labor productivity between both countries.Baumol, William J. and Alan S. Binder, ‘Economics: Principles and Policy’, p. 50BOOK, O’Sullivan, Arthur, Arthur O’Sullivan (economist), Sheffrin, Steven M., Economics: Principles in Action, 2nd, The Wall Street Journal: Classroom Edition, 2003, January 2002, Pearson Prentice Hall: Addison Wesley Longman, Upper Saddle River, New Jersey, 9780130630858, 444, Widely regarded as one of the most powerfulWEB,internationalecon.com/Trade/Tch40/T40-0.php, International Trade Theory and Policy, Steven M Suranovic, 2010, yet counter-intuitiveWEB,web.mit.edu/krugman/www/ricardo.htm, Krugman, Paul, Ricardo’s Difficult Idea, 1996, 2014-08-09, insights in economics, Ricardo’s theory implies that comparative advantage rather than absolute advantage is responsible for much of international trade.

Classical theory and David Ricardo’s formulation

{{More citations needed|section|date=July 2021}}Adam Smith first alluded to the concept of absolute advantage as the basis for international trade in 1776, in The Wealth of Nations:}}Writing several decades after Smith in 1808, Robert Torrens articulated a preliminary definition of comparative advantage as the loss from the closing of trade:}} In 1814 the anonymously published pamphlet Considerations on the Importation of Foreign Corn featured the earliest recorded formulation of the concept of comparative advantage.BOOK, Noel W. Thompson, Nigel F. B. Allington, 13 December 2010, English, Irish and Subversives Among the Dismal Scientists, Emerald Group Publishing, 101, 978-0-85724-062-0,books.google.com/books?id=6YPu0n04GfIC&pg=PA101, BOOK, Maneschi, Andrea, Shigeyoshi Senga, Masatomi Fujimoto, Taichi Tabuchi, 18 May 2017, Ricardo and International Trade, Taylor & Francis, 33, Chapter 3: David Ricardo’s Trade Theory Anticipations and later developments, 978-1-351-68616-7,books.google.com/books?id=jTslDwAAQBAJ&pg=PA33, Torrens would later publish his work External Corn Trade in 1815 acknowledging this pamphlet author’s priority. In 1817, David Ricardo published what has since become known as the theory of comparative advantage in his book On the Principles of Political Economy and Taxation.

Ricardo’s example

(File:Ricardo_example_of_comparative_advantage.svg|thumb|Graph illustrating Ricardo’s example:In case I (diamonds), each country spends 3600 hours to produce a mixture of cloth and wine.In case II (squares), each country specializes in its comparative advantage, resulting in greater total output.)In a famous example, Ricardo considers a world economy consisting of two countries, Portugal and England, each producing two goods of identical quality. In Portugal, the a priori more efficient country, it is possible to produce wine and cloth with less labor than it would take to produce the same quantities in England. However, the relative costs or ranking of cost of producing those two goods differ between the countries.{| class=“wikitable“|+ Hours of work necessary to produce one unit! {{diagonal split header|Country|Produce}}! scope=“col” | Cloth! scope=“col” | Wine! scope=“row” | England|100|120! scope=“row” | Portugal|90|80In this illustration, England could commit 100 hours of labor to produce one unit of cloth, or produce {{sfrac|5|6}} units of wine. Meanwhile, in comparison, Portugal could commit 100 hours of labor to produce {{sfrac|10|9}} units of cloth, or produce {{sfrac|10|8}} units of wine. Portugal possesses an absolute advantage in producing both cloth and wine due to more produced per hour (since {{sfrac|10|9}} > 1). If the capital and labour were mobile, both wine and cloth should be made in Portugal, with the capital and labour of England removed there.BOOK, Ricardo, David, David Ricardo, On the Principles of Political Economy and Taxation, 1817, J. Murray, 160–162, It would undoubtedly be advantageous to the capitalists of England, and to the consumers in both countries, that under such circumstances, the wine and the cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth, should be removed to Portugal for that purpose, If they were not mobile, as Ricardo believed them to be generally, then England’s comparative advantage (due to lower opportunity cost) in producing cloth means that it has an incentive to produce more of that good which is relatively cheaper for them to produce than the other—assuming they have an advantageous opportunity to trade in the marketplace for the other more difficult to produce good.In the absence of trade, England requires 220 hours of work to both produce and consume one unit each of cloth and wine while Portugal requires 170 hours of work to produce and consume the same quantities. England is more efficient at producing cloth than wine, and Portugal is more efficient at producing wine than cloth. So, if each country specializes in the good for which it has a comparative advantage, then the global production of both goods increases, for England can spend 220 labor hours to produce 2.2 units of cloth while Portugal can spend 170 hours to produce 2.125 units of wine. Moreover, if both countries specialize in the above manner and England trades a unit of its cloth for {{sfrac|5|6}} to {{sfrac|9|8}} units of Portugal’s wine, then both countries can consume at least a unit each of cloth and wine, with 0 to 0.2 units of cloth and 0 to 0.125 units of wine remaining in each respective country to be consumed or exported. Consequently, both England and Portugal can consume more wine and cloth under free trade than in autarky.

Ricardian model

The Ricardian model is a general equilibrium mathematical model of international trade. Although the idea of the Ricardian model was first presented in the Essay on Profits (a single-commodity version) and then in the Principles (a multi-commodity version) by David Ricardo, the first mathematical Ricardian model was published by William Whewell in 1833.BOOK, David Ricardo: Critical Assessments, Wood, John Cunningham, 1991, Taylor & Francis, 9780415063807, 312,books.google.com/books?id=h5GzUUfTL4sC&q=Ricardian+model&pg=PA312, The earliest test of the Ricardian model was performed by G.D.A. MacDougall, which was published in Economic Journal of 1951 and 1952.BOOK, International Economics: A European Focus, Ingham, Barbara, 2004, Pearson Education, 9780273655077, 22,books.google.com/books?id=zIaS9R7HUGIC&q=international+economics, In the Ricardian model, trade patterns depend on productivity differences.The following is a typical modern interpretation of the classical Ricardian model.BOOK, Krugman, Paul, Obstfeld, Maurice, International Economics: Theory and Policy, 1988, Prentice Hall, New York, 27–36, 2008, In the interest of simplicity, it uses notation and definitions, such as opportunity cost, unavailable to Ricardo.The world economy consists of two countries, Home and Foreign, which produce wine and cloth. Labor, the only factor of production, is mobile domestically but not internationally; there may be migration between sectors but not between countries. We denote the labor force in Home by textstyle L, the amount of labor required to produce one unit of wine in Home by textstyle a_{LW}, and the amount of labor required to produce one unit of cloth in Home by textstyle a_{LC}. The total amount of wine and cloth produced in Home are Q_W and Q_C respectively. We denote the same variables for Foreign by appending a prime. For instance, textstyle a’_{LW} is the amount of labor needed to produce a unit of wine in Foreign.We do not know if Home can produce cloth using fewer hours of work than Foreign. That is, we do not know if a_{LC}