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Comparative Advantage

Given that economic entities are faced with scarce resources, if one desires more of one thing they are required to transfer resources used in producing another thing. What one gives up to get more of one good is reflected in the opportunity cost, what is sacrificed to obtain more of another good. In his pathbreaking book, An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, Adam Smith, a Scottish Reverend argued "that governments should not particularly favour exports or hinder imports and should allow individuals to get on with making money in the way that seems best to them--they know their own business best, and the wealth of the country consists in their wealth." A contemporary of Smith, David Ricardo formulated the concept of comparative advantage which underlied his opposition to the Corn Laws.

Below are a number of links to both white board presentations from the Khan Academy concerning Comparative and Absolute Advantage:

  • Comparative Advantage Specialization and Gains from Trade
  • Comparative Advantage and Absolute Advantage

  • and video lectures:

  • Absolute and Comparative Advantage
  • Comparative Advantage and Gains from Trade (part 1)
  • Comparative Advantage and Gains from Trade (part 2)

  • English economist demonstrating absolute and comparative advantage between the UK and China when producing cars and cheese.