You do not have permission to edit this page, for the following reasons:

This IP address has been blocked from editing Wikipedia.
This does not affect your ability to read Wikipedia pages.
Most people who see this message have done nothing wrong. Some kinds of blocks restrict editing from specific service providers or telecom companies in response to recent abuse or vandalism, and can sometimes affect other users who are unrelated to that abuse. Review the information below for assistance if you do not believe that you have done anything wrong.

The IP address or range 44.202.0.0/16 has been blocked (disabled) by ‪Blablubbs‬ for the following reason(s):

The IP address that you are currently using has been blocked because it is believed to be a web host provider or colocation provider. To prevent abuse, web hosts and colocation providers may be blocked from editing Wikipedia.
You will not be able to edit Wikipedia using a web host or colocation provider because it hides your IP address, much like a proxy or VPN.
We recommend that you attempt to use another connection to edit. For example, if you use a proxy or VPN to connect to the internet, turn it off when editing Wikipedia. If you edit using a mobile connection, try using a Wi-Fi connection, and vice versa. If you are using a corporate internet connection, switch to a different Wi-Fi network. If you have a Wikipedia account, please log in.
If you do not have any other way to edit Wikipedia, you will need to request an IP block exemption.

How to appeal if you are confident that your connection does not use a colocation provider's IP address:
If you are confident that you are not using a web host, you may appeal this block by adding the following text on your talk page: ((unblock|reason=Caught by a colocation web host block but this host or IP is not a web host. My IP address is _______. Place any further information here. ~~~~)). You must fill in the blank with your IP address for this block to be investigated. Your IP address can be determined here. Alternatively, if you wish to keep your IP address private you can use the unblock ticket request system. There are several reasons you might be editing using the IP address of a web host or colocation provider (such as if you are using VPN software or a business network); please use this method of appeal only if you think your IP address is in fact not a web host or colocation provider.

Administrators: The IP block exemption user right should only be applied to allow users to edit using web host in exceptional circumstances, and requests should usually be directed to the functionaries team via email. If you intend to give the IPBE user right, a CheckUser needs to take a look at the account. This can be requested most easily at SPI Quick Checkuser Requests. Unblocking an IP or IP range with this template is highly discouraged without at least contacting the blocking administrator.

This block will expire on 21:04, 17 October 2024.

Even when blocked, you will usually still be able to edit your user talk page, as well as email administrators and other editors.

For information on how to proceed, please read the FAQ for blocked users and the guideline on block appeals. The guide to appealing blocks may also be helpful.

Other useful links: Blocking policy · Help:I have been blocked
Your IP address is in a range that has been blocked on all Wikimedia Foundation wikis. The block was made by ‪AntiCompositeNumber‬. The reason given is Open proxy/Webhost: Visit the FAQ if you are affected .
- Start of block: 13:55, 18 August 2022
- Expiry of block: 13:55, 18 September 2024
Your current IP address is 44.202.229.202. The blocked range is 44.202.0.0/16. Please include all above details in any queries you make. If you believe you were blocked by mistake, you can find additional information and instructions in the No open proxies global policy. Otherwise, to discuss the block please post a request for review on Meta-Wiki. You could also send an email to the stewards VRT queue at stewards@wikimedia.org including all above details.

You can view and copy the source of this page:

((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 [[Goods (economics)|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.<ref name="uslabor">((cite web|url=http://www.bls.gov/bls/glossary.htm|title=BLS Information |date=February 28, 2008|work=Glossary|publisher=U.S. Bureau of Labor Statistics Division of Information Services |access-date=2009-05-05))</ref> 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]].<ref>((cite book |last1=Maneschi |first1=Andrea |title=Comparative Advantage in International Trade: A Historical Perspective |year=1998 |publisher=Elgar |page=1))</ref>

[[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 internationally<ref>((cite book |last1=Schumacher |first1=Reinhard |title=Free Trade and Absolute and Comparative Advantage: A Critical Comparison of Two Major Theories of International Trade |date=2012 |publisher=Universitätsverlag Potsdam |isbn=9783869561950 |pages=51–52 |quote=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.))</ref>), 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.<ref>Baumol, William J. and Alan S. Binder, 'Economics: Principles and Policy', p. 50</ref><ref name="econbook">((cite book |last1=O'Sullivan |first1=Arthur |author-link1=Arthur O'Sullivan (economist) |last2=Sheffrin |first2=Steven M. |title=Economics: Principles in Action |edition=2nd |series=The Wall Street Journal: Classroom Edition |year=2003 |orig-year= January 2002|publisher= Pearson Prentice Hall: Addison Wesley Longman|location=Upper Saddle River, New Jersey |isbn=9780130630858 |page= 444 ))</ref> Widely regarded as one of the most powerful<ref>((cite web |url=http://internationalecon.com/Trade/Tch40/T40-0.php |title=International Trade Theory and Policy |author=Steven M Suranovic |year=2010))</ref> yet counter-intuitive<ref name="krugman_ricardo">((cite web|url=http://web.mit.edu/krugman/www/ricardo.htm | author=Krugman, Paul|title=Ricardo's Difficult Idea |year=1996 |access-date=2014-08-09))</ref> 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]]'':
((quote|text=If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished [...] but only left to find out the way in which it can be employed with the greatest advantage.<ref>((cite book|last1=Smith|first1=Adam|title=An Inquiry into the Nature and Causes of the Wealth of Nations|date=1776))</ref>))

Writing several decades after Smith in 1808, [[Robert Torrens (economist)|Robert Torrens]] articulated a preliminary definition of comparative advantage as the loss from the closing of trade:
((quote|text=[I]f I wish to know the extent of the advantage, which arises to England, from her giving France a hundred pounds of [[broadcloth]], in exchange for a hundred pounds of lace, I take the quantity of lace which she has acquired by this transaction, and compare it with the quantity which she might, at the same expense of labour and capital, have acquired by manufacturing it at home. The lace that remains, beyond what the labour and capital employed on the cloth, might have fabricated at home, is the amount of the advantage which England derives from the exchange.<ref>((cite book|last1=Torrens|first1=Robert|title=The Economists Refuted and Other Early Economic Writings|year=1808|publisher=Kelley|location=New York|edition=1984|page=37))</ref>)) 
In 1814 the anonymously published pamphlet ''Considerations on the Importation of Foreign Corn'' featured the earliest recorded formulation of the concept of comparative advantage.<ref name="ThompsonAllington2010">((cite book | editor1 = Noel W. Thompson | editor2 = Nigel F. B. Allington | date = 13 December 2010 | title = English, Irish and Subversives Among the Dismal Scientists | publisher = Emerald Group Publishing | pages = 101 | isbn = 978-0-85724-062-0 | url = https://books.google.com/books?id=6YPu0n04GfIC&pg=PA101))</ref><ref name="SengaFujimotoTabuchi2017">((cite book |last=Maneschi |first=Andrea | editor1 = Shigeyoshi Senga | editor2 = Masatomi Fujimoto | editor3 = Taichi Tabuchi | date = 18 May 2017 | title = Ricardo and International Trade | publisher = Taylor & Francis | pages = 33 |chapter=Chapter 3: David Ricardo's Trade Theory Anticipations and later developments | isbn = 978-1-351-68616-7 | chapter-url = https://books.google.com/books?id=jTslDwAAQBAJ&pg=PA33))</ref> Torrens would later publish his work ''External Corn Trade'' in 1815 acknowledging this pamphlet author's priority.<ref name="ThompsonAllington2010"></ref>  
[[Image:David ricardo.jpg|150px|right|thumb|David Ricardo]]

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:<br />In case I (diamonds), each country spends 3600 hours to produce a mixture of cloth and wine.<br />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 and a posteriori|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
|80
|}

In 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.<ref>((cite book |last1=Ricardo |first1=David |author1-link=David Ricardo |title=On the Principles of Political Economy and Taxation |date=1817 |publisher=J. Murray |pages=160–162 |quote=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))</ref> 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.<ref name="John Wood">((cite book |title= David Ricardo: Critical Assessments|last= Wood |first= John Cunningham|year= 1991 |publisher= Taylor & Francis |isbn= 9780415063807|page= 312 |url= https://books.google.com/books?id=h5GzUUfTL4sC&q=Ricardian+model&pg=PA312))</ref> The earliest test of the Ricardian model was performed by G.D.A. MacDougall, which was published in ''Economic Journal'' of 1951 and 1952.<ref name="Barbara Ingham">((cite book |title= International Economics: A European Focus|last= Ingham |first= Barbara|year= 2004 |publisher= Pearson Education |isbn= 9780273655077|page= 22 |url= https://books.google.com/books?id=zIaS9R7HUGIC&q=international+economics))</ref> In the Ricardian model, trade patterns depend on productivity differences.

The following is a typical modern interpretation of the classical Ricardian model.<ref>((cite book|last1=Krugman|first1=Paul|last2=Obstfeld|first2=Maurice|title=International Economics: Theory and Policy|year=1988|publisher=Prentice Hall|location=New York|pages=27–36|edition=2008))</ref> 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 [[labor mobility|mobile]] domestically but not internationally; there may be migration between sectors but not between countries. We denote the labor force in Home by <math>\textstyle L</math>, the amount of labor required to produce one unit of wine in Home by <math>\textstyle a_{LW}</math>, and the amount of labor required to produce one unit of cloth in Home by <math>\textstyle a_{LC}</math>. The total amount of wine and cloth produced in Home are <math>Q_W</math> and <math>Q_C</math> respectively. We denote the same variables for Foreign by appending a [[prime (symbol)|prime]]. For instance, <math>\textstyle a'_{LW}</math> 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 <math>a_{LC}<a'_{LC}</math>. Similarly, we do not know if Home can produce wine using fewer hours of work. However, we assume Home is ''relatively'' more productive than Foreign in making in cloth vs. wine:
:<math>a_{LC}/a'_{LC}<a_{LW}/a'_{LW}.</math>

Equivalently, we may assume that Home has a comparative advantage in cloth in the sense that it has a lower opportunity cost for cloth in terms of wine than Foreign:
:<math>a_{LC}/a_{LW}<a'_{LC}/a'_{LW}.</math>

In the absence of trade, the relative price of cloth and wine in each country is determined solely by the relative labor cost of the goods. Hence the relative autarky price of cloth is <math>a_{LC}/a_{LW}</math> in Home and <math>a'_{LC}/a'_{LW}</math> in Foreign. With free trade, the price of cloth or wine in either country is the world price <math>P_C</math> or<math>P_W</math>.

Instead of considering the world demand (or supply) for cloth and wine, we are interested in the world ''relative demand'' (or ''relative supply'') for cloth and wine, which we define as the ratio of the world demand (or supply) for cloth to the world demand (or supply) for wine. In general equilibrium, the world relative price <math>\textstyle P_C/P_W</math> will be determined uniquely by the intersection of world relative demand <math>\textstyle RD</math> and world relative supply <math>\textstyle RS</math> curves.

[[File:World relative supply and demand in the classical Ricardo model of one-factor international trade between two countries.svg|thumb|The demand for cloth relative to wine decreases with the relative price of cloth in terms of wine; the supply <math>RS</math> of cloth relative to wine increases with relative price. Two relative demand curves <math>RD_1</math> and <math>RD_2</math> are drawn for illustrative purposes.]]
We assume that the relative demand curve reflects substitution effects and is decreasing with respect to relative price. The behavior of the relative supply curve, however, warrants closer study. Recalling our original assumption that Home has a comparative advantage in cloth, we consider five possibilities for the relative quantity of cloth supplied at a given price.

* If <math>\textstyle P_C/P_W = a_{LC}/a_{LW}<a'_{LC}/a'_{LW}</math>, then Foreign specializes in wine, for the wage <math>P'_W/a'_{LW}</math> in the wine sector is greater than the wage <math>P'_C/a'_{LC}</math> in the cloth sector. However, Home workers are indifferent between working in either sector. As a result, the quantity of cloth supplied can take any value.
* If <math>\textstyle P_C/P_W < a_{LC}/a_{LW}<a'_{LC}/a'_{LW}</math>, then both Home and Foreign specialize in wine, for similar reasons as above, and so the quantity of cloth supplied is zero.
* If <math>\textstyle a_{LC}/a_{LW}<P_C/P_W < a'_{LC}/a'_{LW}</math>, then Home specializes in cloth whereas Foreign specializes in wine. The quantity of cloth supplied is given by the ratio <math>\textstyle \frac{L/a_{LC)){L'/a'_{LW))</math> of the world production of cloth to the world production of wine.
* If <math>\textstyle a_{LC}/a_{LW}<a'_{LC}/a'_{LW}<P_C/P_W</math>, then both Home and Foreign specialize in cloth. The quantity of cloth supplied tends to infinity as the quantity of wine supplied approaches zero.
* If <math>\textstyle a_{LC}/a_{LW}<a'_{LC}/a'_{LW}=P_C/P_W</math>, then Home specializes in cloth while Foreign workers are indifferent between sectors. Again, the relative quantity of cloth supplied can take any value.

[[File:Consumption possibilities in the classical Ricardo model of one-factor international trade between two countries.svg|thumb|The blue triangle depicts Home's original production (and consumption) possibilities. By trading, Home can also consume bundles in the pink triangle despite facing the same productions possibility frontier.]]
As long as the relative demand is finite, the relative price is always bounded by the inequality
:<math> a_{LC}/a_{LW}\leq {P_C/P_W}\leq {a'_{LC}/a'_{LW)).</math>

In autarky, Home faces a [[production possibilities frontier|production constraint]] of the form
:<math> a_{LC}Q_C+a_{LW}Q_W\leq L,</math>
from which it follows that Home's cloth consumption at the production possibilities frontier is
:<math>Q_C=L/a_{LC}-(a_{LW}/a_{LC})Q_W</math>.

With free trade, Home produces cloth exclusively, an amount of which it exports in exchange for wine at the prevailing rate. Thus Home's overall consumption is now subject to the constraint
:<math>a_{LC}Q_C+a_{LC}(P_W/P_C)Q_W\leq L</math>
while its cloth consumption at the ''consumption possibilities'' frontier is given by
:<math>Q_C=L/a_{LC}-(P_W/P_C)Q_W\geq  L/a_{LC}-(a_{LW}/a_{LC})Q_W</math>.

A symmetric argument holds for Foreign. Therefore, by trading and specializing in a good for which it has a comparative advantage, each country can expand its consumption possibilities. Consumers can choose from bundles of wine and cloth that they could not have produced themselves in closed economies.

There is another way to prove the theory of comparative advantage, which requires less assumption than the above-detailed proof, and in particular does not require for the hourly wages to be equal in both industries, nor requires any equilibrium between offer and demand on the market.<ref name="G.L.">((cite book |title= Mathematical methods for Economic analysis|last= L. |first= G.|year= 2021 |url= https://bookdown.org/praxeolab/mathematics-for-economics/chapter1.html))</ref> Such a proof can be extended to situations with many goods and many countries, non constant returns and more than one factor of production.

=== Terms of trade ===
Terms of trade is the rate at which one good could be traded for another. If both countries specialize in the good for which they have a comparative advantage then trade, the terms of trade for a good (that benefit both entities) will fall between each entities opportunity costs. In the example above one unit of cloth would trade for between <math>\frac 56</math> units of wine and <math>\frac 9 8</math> units of wine.<ref>((Cite web|url=http://www.reviewecon.com/comparative-advantage.html|title=AP Economics Review: Comparative Advantage, Absolute Advantage, and Terms of Trade|date=2016-09-28|website=www.reviewecon.com/comparative-advantage.html))</ref>

==Haberler's opportunity costs formulation==
In 1930 Austrian-American economist [[Gottfried Haberler]] detached the doctrine of comparative advantage from Ricardo's labor theory of value and provided a modern opportunity cost formulation. Haberler's reformulation of comparative advantage revolutionized the theory of international trade and laid the conceptual groundwork of modern trade theories.

Haberler's innovation was to reformulate the theory of comparative advantage such that the value of good X is measured in terms of the forgone units of production of good Y rather than the labor units necessary to produce good X, as in the Ricardian formulation. Haberler implemented this opportunity-cost formulation of comparative advantage by introducing the concept of a production possibility curve into international trade theory.<ref>((cite journal|last1=Bernhofen|first1=Daniel|title=Gottfried Haberler's 1930 reformulation of comparative advantage in retrospect|journal=Review of International Economics|date=2005|volume=13|issue=5|pages=997–1000|doi=10.1111/j.1467-9396.2005.00550.x|s2cid=9787214))</ref>

==Modern theories==
((More citations needed|section|date=July 2021))
Since 1817, economists have attempted to generalize the [[Ricardian model]] and derive the principle of comparative advantage in broader settings, most notably in the [[neoclassical economics|neoclassical]] ''specific factors'' [[Richardo-Viner model|Ricardo-Viner]] (which allows for the model to include more factors than just labour)<ref>Krugman, P.R.; Obstfeld, M.; Melitz, M.J. (2015). "International Trade. Theory and Policy", 10th Edition. ''Pearson''</ref> and ''factor proportions'' [[Heckscher–Ohlin model]]s. Subsequent developments in the [[new trade theory]], motivated in part by the empirical shortcomings of the H–O model and its inability to explain [[intra-industry trade]], have provided an explanation for aspects of trade that are not accounted for by comparative advantage.<ref>((cite book|last1=Maneschi|first1=Andrea|title=Comparative Advantage in International Trade: A Historical Perspective|year=1998|publisher=Elgar|location=Cheltenham|pages=6–13))</ref> Nonetheless, economists like [[Alan Deardorff]],<ref>((cite journal|last1=Deardorff|first1=Alan|title=The General Validity of the Law of Comparative Advantage|journal=Journal of Political Economy|date=Oct 1980|volume=88|issue=5|pages=941–57|doi=10.1086/260915|s2cid=58917101))</ref> [[Avinash Dixit]], [[Gottfried Haberler]], and [[Victor D. Norman]]<ref>((cite book|last1=Dixit|first1=Avinash|last2=Norman|first2=Victor|title=Theory of International Trade: A Dual, General Equilibrium Approach|year=1980|publisher=Cambridge University Press|location=Cambridge|pages=93–126))</ref> have responded with weaker generalizations of the principle of comparative advantage, in which countries will only ''tend'' to export goods for which they have a comparative advantage.

===Dornbusch et al.'s continuum of goods formulation===
In both the Ricardian and H–O models, the comparative advantage theory is formulated for a 2 countries/2 commodities case. It can be extended to a 2 countries/many commodities case, or a many countries/2 commodities case. Adding commodities in order to have a smooth continuum of goods is the major insight of the seminal paper by Dornbusch, Fisher, and Samuelson. In fact, inserting an increasing number of goods into the chain of comparative advantage makes the gaps between the ratios of the labor requirements negligible, in which case the three types of equilibria around any good in the original model collapse to the same outcome. It notably allows for transportation costs to be incorporated, although the framework remains restricted to two countries.<ref>((Cite journal | last1 = Dornbusch | first1 = R. | last2 = Fischer | first2 = S. | last3 = Samuelson | first3 = P. A. | year = 1977 | title = Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods | journal = [[American Economic Review]] | volume = 67 | issue = 5 | pages = 823–39 | jstor = 1828066 ))</ref><ref>((Cite journal | doi = 10.2307/1885496| jstor = 1885496| title = Heckscher-Ohlin Trade Theory with a Continuum of Goods| journal = The Quarterly Journal of Economics| volume = 95| issue = 2| pages = 203–224| date = 1980| last1 = Dornbusch | first1 = R. | last2 = Fischer | first2 = S. | last3 = Samuelson | first3 = P. A. ))</ref> But in the case with many countries (more than 3 countries) and many commodities (more than 3 commodities), the notion of comparative advantage requires a substantially more complex formulation.<ref>((Cite journal | doi = 10.1111/j.1467-9396.2005.00552.x| title = How Robust is Comparative Advantage?| journal = Review of International Economics| volume = 13| issue = 5| pages = 1004–16| date = 2005| last1 = Deardorff | first1 = A. V.| url = https://deepblue.lib.umich.edu/bitstream/2027.42/73670/1/j.1467-9396.2005.00552.x.pdf| hdl = 2027.42/73670| s2cid = 29501533| hdl-access = free))</ref>

===Deardorff's general law of comparative advantage===
Skeptics of comparative advantage have underlined that its theoretical implications hardly hold when applied to individual commodities or pairs of commodities in a world of multiple commodities. Deardorff argues that the insights of comparative advantage remain valid if the theory is restated in terms of averages across all commodities. His models provide multiple insights on the correlations between vectors of trade and vectors with relative-autarky-price measures of comparative advantage. "Deardorff's general law of comparative advantage" is a model incorporating multiple goods which takes into account tariffs, transportation costs, and other obstacles to trade.

===Alternative approaches===
Recently, Y. Shiozawa succeeded in constructing a theory of international value in the tradition of Ricardo's [[cost-of-production theory of value]].<ref>Y. Shiozawa, A new construction of Ricardian trade theory / A many-country, many commodity case with intermediates goods and choice of production techniques, Evolutionary and Institutional Economics Review '''3'''(2): 141–87, 2007.</ref><ref>Y. Shiozawa, A Final Solution of the Ricardo Problem on International Values, Iwanami Shoten, 2014.</ref> This was based on a wide range of assumptions: Many countries; Many commodities; Several production techniques for a product in a country; Input trade ([[International trade#Traded intermediate goods|intermediate goods]] are freely traded); Durable capital goods with constant efficiency during a predetermined lifetime; No transportation cost (extendable to positive cost cases).

In a famous comment, McKenzie pointed that "A moment's consideration will convince one that Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in England."<ref>L. W. McKenzie Specialization and Efficiency in World Production, Review of Economic Studies 21(3): 165–80. Citation from p.179.</ref> However, McKenzie and later researchers could not produce a general theory which includes traded input goods because of the mathematical difficulty.<ref name = economics>Appendix A: Previous Literature in A. Deardorff, Ricardian Comparative Advantage with Intermediate Inputs, The North American Journal of Economics and Finance '''16'''(1): 11–34, March 2005. http://fordschool.umich.edu/rsie/workingpapers/Papers501-525/r501.pdf</ref> As John Chipman points it, McKenzie found that "introduction of trade in intermediate product necessitates a fundamental alteration in classical analysis."<ref>Chipman, John S. (1965). "A Survey of the Theory of International Trade: Part 1, The Classical Theory". Econometrica 33 (3): 477–519. Section 1.8, p. 509.</ref> Durable capital goods such as machines and installations are inputs to the productions in the same title as part and ingredients.

In view of the new theory, no physical criterion exists. Deardorff examines 10 versions of definitions in two groups but could not give a general formula for the case with intermediate goods.<ref name = economics/> The competitive patterns are determined by the traders trials to find cheapest products in a world. The search of cheapest product is achieved by world optimal procurement. Thus the new theory explains how the global supply chains are formed.<ref>Y. Shiozawa (2016) The revival of classical theory of values, in Nobuharu Yokokawa et als. (Eds.) The Rejuvenation of Political Economy, May 2016, Oxon and New York: Routledge. Chapter 8, pp. 151–72.</ref><ref>Y. Shiozawa, The New Interpretation of Ricardo's Four Magic Numbers and the New Theory of International Values / A Comment on Faccarello's "Comparative advantage"). A paper read on a conference on March 23, 2016.</ref>

==Empirical approach to comparative advantage==
Comparative advantage is a theory about the benefits that specialization and trade would bring, rather than a strict prediction about actual behavior. (In practice, governments restrict international trade for a variety of reasons; under [[Ulysses S. Grant]], the US postponed opening up to free trade until its industries were up to strength, following the example set earlier by Britain.<ref>((Cite journal|last=Chang|first=Ha-Joon|author-link=Ha-Joon Chang|date=December 2003|title=Kicking Away the Ladder: The "Real" History of Free Trade|journal=FPIF Special Report))</ref>) Nonetheless there is a large amount of [[empirical evidence|empirical]] work testing the predictions of comparative advantage. The empirical works usually involve testing predictions of a particular model. For example, the Ricardian model predicts that technological differences in countries result in differences in labor productivity. The differences in labor productivity in turn determine the comparative advantages across different countries. Testing the Ricardian model for instance involves looking at the relationship between relative labor productivity and international trade patterns. A country that is relatively efficient in producing shoes tends to export shoes.

===Direct test: natural experiment of Japan===
Assessing the validity of comparative advantage on a global scale with the examples of contemporary economies is analytically challenging because of the multiple factors driving globalization: indeed, investment, migration, and technological change play a role in addition to trade. Even if we could isolate the workings of open trade from other processes, establishing its causal impact also remains complicated: it would require a comparison with a counterfactual world without open trade. Considering the durability of different aspects of globalization, it is hard to assess the sole impact of open trade on a particular economy.((Cn|date=August 2021))

[[Daniel Bernhofen]] and John Brown have attempted to address this issue, by using a natural experiment of a sudden transition to open trade in a market economy. They focus on the case of Japan.<ref>((cite journal|last1=Bernhofen|first1=Daniel|last2=Brown|first2=John|title=A Direct Test of the Theory of Comparative Advantage: The Case of Japan|journal=Journal of Political Economy|date=2004|volume=112|issue=1|pages=48–67|doi=10.1086/379944|s2cid=17377670))</ref><ref>((cite journal|last1=Bernhofen|first1=Daniel|last2=Brown|first2=John|title=An Empirical Assessment of the Comparative Advantage Gains from Trade: Evidence from Japan|journal=American Economic Review|date=2005|volume=95|issue=1|pages=208–225|doi=10.1257/0002828053828491))</ref> The Japanese economy indeed developed over several centuries under autarky and a quasi-isolation from international trade but was, by the mid-19th century, a sophisticated market economy with a population of 30 million. Under Western military pressure, Japan opened its economy to foreign trade through a series of [[unequal treaties]].((Cn|date=August 2021))

In 1859, the treaties limited tariffs to 5% and opened trade to Westerners. Considering that the transition from autarky, or self-sufficiency, to open trade was brutal, few changes to the fundamentals of the economy occurred in the first 20 years of trade. The general law of comparative advantage theorizes that an economy should, on average, export goods with low self-sufficiency prices and import goods with high self-sufficiency prices. Bernhofen and Brown found that by 1869, the price of Japan's main export, silk and derivatives, saw a 100% increase in real terms, while the prices of numerous imported goods declined of 30-75%. In the next decade, the ratio of imports to gross domestic product reached 4%.<ref>((cite journal|last1=Bernhofen|first1=Daniel|last2=John|first2=Brown|title=Testing the General Validity of the Heckscher-Ohlin Theorem|journal=American Economic Journal: Microeconomics|date=2016|volume=8|issue=4|pages=54–90|doi=10.1257/mic.20130126))</ref>

===Structural estimation===
Another important way of demonstrating the validity of comparative advantage has consisted in 'structural estimation' approaches. These approaches have built on the Ricardian formulation of two goods for two countries and subsequent models with many goods or many countries. The aim has been to reach a formulation accounting for both multiple goods and multiple countries, in order to reflect real-world conditions more accurately. Jonathan Eaton and Samuel Kortum underlined that a convincing model needed to incorporate the idea of a 'continuum of goods' developed by Dornbusch et al. for both goods and countries. They were able to do so by allowing for an arbitrary (integer) number i of countries, and dealing exclusively with unit labor requirements for each good (one for each point on the unit interval) in each country (of which there are i).<ref>((cite journal|last1=Eaton|first1=Jonathan|last2=Kortum|first2=Samuel|title=Putting Ricardo to Work†|journal=Journal of Economic Perspectives|date=Spring 2012|volume=26|issue=2|pages=65–90|doi=10.1257/jep.26.2.65|url=http://www.aeaweb.org/jep/app/2602_Eaton_Kortum_app.pdf))</ref>

===Earlier empirical work===
Two of the first tests of comparative advantage were by MacDougall (1951, 1952).<ref>((cite news | author=MacDougall, G. D. A.| title=British and American exports: A study suggested by the theory of comparative costs. Part I.| journal=The Economic Journal| year=1951| volume=61 | issue=244|pages=697–724))</ref><ref>((cite news | author=MacDougall, G. D. A.| title=British and American exports: A study suggested by the theory of comparative costs. Part II.| journal=The Economic Journal| year=1952| volume=62 | issue=247|pages=487–521))</ref> A prediction of a two-country Ricardian comparative advantage model is that countries will export goods where output per worker (i.e. productivity) is higher. That is, we expect a positive relationship between output per worker and the number of exports. MacDougall tested this relationship with data from the US and UK, and did indeed find a positive relationship. The statistical test of this positive relationship was replicated<ref>((cite news | author=Stern, Robert M.| title=British and American productivity and comparative costs in international trade| journal=Oxford Economic Papers |year=1962| pages=275–96))</ref><ref>((cite news | author=Balassa, Bela. | title=An empirical demonstration of classical comparative cost theory| journal=The Review of Economics and Statistics|year=1963 |pages=231–238))</ref> with new data by Stern (1962) and Balassa (1963).

Dosi et al. (1988)<ref>((cite book | author=Dosi, G., Pavitt, K, & L. Soete | title=The Economics of Technical Change and International Trade | year=1988 | publisher=Brighton: Wheatsheaf ))</ref> conducted a book-length empirical examination that suggests that international trade in manufactured goods is largely driven by differences in national technological competencies.

One critique of the textbook model of comparative advantage is that there are only two goods. The results of the model are robust to this assumption. Dornbusch et al. (1977)<ref>((cite news |author1=Dornbusch, R. |author2=Fischer, S. |author3=P. Samuelson |name-list-style=amp | title=Comparative Advantage, Trade and Payments in a Ricardian Model with a Continuum of Goods | journal=American Economic Review | volume=67 | year=1977 | pages=823–39  ))</ref> generalized the theory to allow for such a large number of goods as to form a smooth continuum. Based in part on these generalizations of the model, Davis (1995)<ref>((cite journal | author=Davis, D. | title=Intraindustry Trade: A Heckscher-Ohlin-Ricardo Approach | journal=Journal of International Economics | volume=39 | year=1995 | issue=3–4 | pages=201–26 | doi=10.1016/0022-1996(95)01383-3| citeseerx=10.1.1.557.8401 ))</ref> provides a more recent view of the Ricardian approach to explain trade between countries with similar resources.

More recently, Golub and Hsieh (2000)<ref>((cite news |author1=Golub, S.  |author2=C-T Hsieh | title=Classical Ricardian Theory of Comparative Advantage Revisited | journal=Review of International Economics | volume=8 | issue=2 | year=2000 | pages=221–34 ))</ref> presents modern statistical analysis of the relationship between relative productivity and trade patterns, which finds reasonably strong correlations, and Nunn (2007)<ref>((cite news | author=Nunn, N| title=Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade| journal=Quarterly Journal of Economics | volume=122 | issue=2 | year=2007 |pages=569–600))</ref> finds that countries that have greater enforcement of contracts specialize in goods that require relationship-specific investments.

Taking a broader perspective, there has been work about the benefits of international trade. Zimring & Etkes (2014)<ref>Zimring, A. & Etkes, H. (2014) "When Trade Stops: Lessons from the 2007–2010 Gaza Blockade". ''Journal of International Economics'', forthcoming.</ref> finds that the [[Blockade of the Gaza Strip]], which substantially restricted the availability of imports to Gaza, saw labor productivity fall by 20% in three years. Markusen et al. (1994)<ref>((cite book |author1=Markusen, J.R. |author2=Melvin J.R., Kaempfer |author3=W.M., K. Maskus |name-list-style=amp |year=1994 |title=International Trade: Theory and Evidence |url=http://www.colorado.edu/Economics/courses/Markusen/textbook/mmkm3.pdf |access-date=2014-08-13 |page=218 |publisher=McGraw-Hill |isbn=978-0070404472 |archive-url=https://web.archive.org/web/20150131180218/http://www.colorado.edu/Economics/courses/Markusen/textbook/mmkm3.pdf |archive-date=2015-01-31 |url-status=dead ))</ref> reports the effects of moving away from [[autarky]] to [[free trade]] during the [[Meiji Restoration]], with the result that national income increased by up to 65% in 15 years.
((clear))

==Criticism==
Several arguments have been advanced against using comparative advantage as a justification for advocating free trade, and they have gained an audience among economists. [[James Brander]] and [[Barbara Spencer]] demonstrated how, in a strategic setting where a few firms compete for the world market, export subsidies and import restrictions can keep foreign firms from competing with national firms, increasing welfare in the country implementing these so-called strategic trade policies.<ref>((cite news |last=Krugman |first=Paul R. |title=Is Free Trade Passe? |journal=[[Journal of Economic Perspectives]] |year=1987 |volume=1 |issue=2 |pages=131–44))</ref>

There are some economists who dispute the claims of the benefit of comparative advantage. [[James K. Galbraith]] has stated that "free trade has attained the status of a god" and that "((nbsp))... none of the world's most successful trading regions, including Japan, Korea, Taiwan, and now mainland China, reached their current status by adopting [[neoliberal]] trading rules." He argues that comparative advantage relies on the assumption of [[constant returns]], which he states is not generally the case.<ref>James K. Galbraith, The Predator State, Free Press, 2008, pp. 68–69</ref> According to Galbraith, nations trapped into specializing in agriculture are condemned to perpetual poverty, as agriculture is dependent on land, a finite non-increasing natural resource.<ref>((Cite book|title=The Predator State: How conservatives abandoned the free market and why liberals should too|last=K.|first=Galbraith, James|year=2008|isbn=9781416566830|edition=First Free Press hardcover|location=New York|pages=[https://archive.org/details/predatorstatehow00galb/page/70 70]|oclc=192109752|author-link=James K. Galbraith))</ref>

==See also==
((Portal|Business and economics))
* [[Bureau of Labor Statistics]]
* [[Keynesian beauty contest]]
* [[Resource curse]]
* [[Revealed comparative advantage]]

==References==
((Reflist))

==Bibliography==
((refbegin|30em))
* ((cite journal | last1 = Bernhofen | first1 = Daniel M | year = 2005 | title = Gottfried haberler's 1930 reformulation of comparative advantage in retrospect | journal = Review of International Economics | volume = 13 | issue = 5| pages = 997–1000 | doi=10.1111/j.1467-9396.2005.00550.x| s2cid = 9787214 ))
* ((cite journal | last1 = Bernhofen | first1 = Daniel M. | last2 = Brown | first2 = John C. | year = 2004 | title = A Direct Test of the Theory of Comparative Advantage: The Case of Japan | journal = Journal of Political Economy | volume = 112 | issue = 1| pages = 48–67 | doi=10.1086/379944| citeseerx = 10.1.1.194.9649 | s2cid = 17377670 ))
* ((cite journal | last1 = Bernhofen | first1 = Daniel M. | last2 = Brown | first2 = John C. | year = 2005 | title = An Empirical Assessment of the Comparative Advantage Gains from Trade: Evidence from Japan | journal = American Economic Review | volume = 95 | issue = 1| pages = 208–25 | doi=10.1257/0002828053828491))
* ((cite journal | last1 = Bernhofen | first1 = Daniel M. | last2 = Brown | first2 = John C. | year = 2016 | title = Testing the General Validity of the Heckscher-Ohlin Theorem | journal = American Economic Journal: Microeconomics | volume = 8 | issue = 4| pages = 54–90 | doi=10.1257/mic.20130126))
* ((cite journal | last1 = Findlay | first1 = Ronald | year = 1987 | title = Comparative Advantage | journal = The New Palgrave: A Dictionary of Economics | volume = 1 | pages = 514–17 ))
* Markusen, Melvin, Kaempfer and Maskus, "International Trade: Theory and Evidence"
* Hardwick, Khan and Langmead (1990). ''An Introduction to Modern Economics'' 3rd ed.
* A. O'Sullivan & S.M. Sheffrin (2003). ''Economics. Principles & Tools''.
((refend))

==External links==
* [http://voxeu.org/content/cloth-wine-relevance-ricardo-s-comparative-advantage-21st-century "Cloth for Wine? The Relevance of Ricardo's Comparative Advantage in the 21st Century" VoxEU Ebook.] ((Webarchive|url=https://web.archive.org/web/20220702132700/https://voxeu.org/content/cloth-wine-relevance-ricardo-s-comparative-advantage-21st-century |date=2022-07-02 ))
* David Ricardo's [https://web.archive.org/web/20020806175422/http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/ricardo/prin/index.html The Principles of Trade and Taxation] (original source text)<!-- Broken (timeout) 20110228 Chealer -->
* [http://web.mit.edu/krugman/www/ricardo.htm Ricardo's Difficult Idea], [[Paul Krugman]]'s 1996 exploration of why non-economists don't understand the idea of comparative advantage
* [http://internationalecon.com/v1.0/ch40/ch40.html The Ricardian Model of Comparative Advantage]
* [http://www.investopedia.com/ask/answers/09/law-comparative-advantage.asp What is comparative advantage? | Investopedia]
* [http://www.investopedia.com/terms/c/comparativeadvantage.asp Comparative Advantage Definition | Investopedia]
* [http://icalc.co.il/calculators/index.php/economics-calculators/134-comparative-advantage-calculator.html Comparative Advantage Calculator]
* [https://www.thestreet.com/politics/comparative-advantage-14651012 What Is Comparative Advantage? | The Street]

((Trade|state=expanded))
((Authority control))

((DEFAULTSORT:Comparative Advantage))
[[Category:Microeconomic theories]]
[[Category:Classical economics]]
[[Category:Economics laws]]
[[Category:International trade theory]]
[[Category:Economics comparisons]]

Pages transcluded onto the current version of this page (help):

Comparative advantage (edit)
Template:Ambox (view source) (template editor protected)
Template:Authority control (view source) (template editor protected)
Template:Blockquote (view source) (template editor protected)
Template:Blockquote/styles.css (view source) (template editor protected)
Template:Category handler (view source) (protected)
Template:Citation needed (view source) (protected)
Template:Cite book (view source) (protected)
Template:Cite journal (view source) (protected)
Template:Cite news (view source) (protected)
Template:Cite web (view source) (protected)
Template:Clear (view source) (protected)
Template:Cn (view source) (template editor protected)
Template:Delink (view source) (template editor protected)
Template:Diagonal split header (view source) (semi-protected)
Template:Find sources mainspace (view source) (template editor protected)
Template:Fix (view source) (protected)
Template:Fix/category (view source) (template editor protected)
Template:Hlist/styles.css (view source) (protected)
Template:Icon (view source) (template editor protected)
Template:International trade (edit)
Template:Longitem (view source) (template editor protected)
Template:Main other (view source) (protected)
Template:More citations needed (view source) (template editor protected)
Template:Navbox (view source) (template editor protected)
Template:Nbsp (view source) (protected)
Template:Pagetype (view source) (protected)
Template:Portal (view source) (template editor protected)
Template:Quote (view source) (template editor protected)
Template:Refbegin (view source) (template editor protected)
Template:Refbegin/styles.css (view source) (template editor protected)
Template:Refend (view source) (template editor protected)
Template:Reflist (view source) (protected)
Template:Reflist/styles.css (view source) (protected)
Template:SDcat (view source) (template editor protected)
Template:Sfrac (view source) (extended confirmed protected)
Template:Sfrac/styles.css (view source) (extended confirmed protected)
Template:Short description (view source) (protected)
Template:Short description/lowercasecheck (view source) (protected)
Template:Sp (view source) (template editor protected)
Template:Spaces (view source) (protected)
Template:Tooltip (view source) (template editor protected)
Template:Tooltip/styles.css (view source) (template editor protected)
Template:Trade (edit)
Template:Webarchive (view source) (template editor protected)
Template:Yesno (view source) (protected)
Template:Yesno-no (view source) (template editor protected)
Template:Yesno-yes (view source) (template editor protected)
Module:Arguments (view source) (protected)
Module:Authority control (view source) (template editor protected)
Module:Authority control/config (view source) (template editor protected)
Module:Category handler (view source) (protected)
Module:Category handler/blacklist (view source) (protected)
Module:Category handler/config (view source) (protected)
Module:Category handler/data (view source) (protected)
Module:Category handler/shared (view source) (protected)
Module:Check for unknown parameters (view source) (protected)
Module:Citation/CS1 (view source) (protected)
Module:Citation/CS1/COinS (view source) (protected)
Module:Citation/CS1/Configuration (view source) (protected)
Module:Citation/CS1/Date validation (view source) (protected)
Module:Citation/CS1/Identifiers (view source) (protected)
Module:Citation/CS1/Utilities (view source) (protected)
Module:Citation/CS1/Whitelist (view source) (protected)
Module:Citation/CS1/styles.css (view source) (protected)
Module:Delink (view source) (template editor protected)
Module:Disambiguation (view source) (protected)
Module:Disambiguation/templates (view source) (protected)
Module:EditAtWikidata (view source) (protected)
Module:Find sources (view source) (template editor protected)
Module:Find sources/config (view source) (template editor protected)
Module:Find sources/links (view source) (template editor protected)
Module:Find sources/templates/Find sources mainspace (view source) (template editor protected)
Module:Icon (view source) (template editor protected)
Module:Icon/data (view source) (template editor protected)
Module:Message box (view source) (protected)
Module:Message box/ambox.css (view source) (protected)
Module:Message box/configuration (view source) (protected)
Module:Namespace detect/config (view source) (protected)
Module:Namespace detect/data (view source) (protected)
Module:Navbar (view source) (protected)
Module:Navbar/configuration (view source) (protected)
Module:Navbar/styles.css (view source) (protected)
Module:Navbox (view source) (template editor protected)
Module:Navbox/configuration (view source) (template editor protected)
Module:Navbox/styles.css (view source) (template editor protected)
Module:Pagetype (view source) (protected)
Module:Pagetype/config (view source) (protected)
Module:Portal (view source) (template editor protected)
Module:Portal/images/b (view source) (template editor protected)
Module:Portal/styles.css (view source) (template editor protected)
Module:Redirect (view source) (protected)
Module:SDcat (view source) (template editor protected)
Module:String (view source) (protected)
Module:Unsubst (view source) (protected)
Module:Webarchive (view source) (template editor protected)
Module:Webarchive/data (view source) (template editor protected)
Module:Yesno (view source) (protected)

Return to Comparative advantage.

Retrieved from "https://en.wikipedia.org/wiki/Comparative_advantage"