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Overview



The argument developed by David Ricardo that countries should specialise in producing those goods and services that it can produce most cheaply within the economy and import those that are more expensive to produce

A country has a comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost: i.e. if it has to forgo less of other goods in order to produce it

Better living standards

By letting comparative advantage guide who makes what, free trade increases total world output and thereby raises living standards.

Specialisation

Under free trade, each country specialises in its area(s) of comparative advantage and then trades with other countries to obtain the goods and services it desires to consume.

Some countries buy products from abroad that their own producers would be capable of producing with fewer resources. This is because it enables its producers to concentrate on producing those products they are even better at producing.


Using Portugal and England as examples, Ricardo calculated that even if both countries were capable of producing cloth and wine, England could produce cloth with much less effort, and Portugal was much better at producing wine. As a result, instead of wasting time and money struggling to do something they weren't good at, Portugal and England would both be better off if they specialized, then traded with each other. Comparative Advantage means it's better to capitalize on your strengths than to shore up your weaknesses.

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Comparative advantage

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