Theory of Comparative Advantages

Comparative advantage is a term associated with 19th Century English

economist David Ricardo.
David Ricardo
A famous economist named David Ricardo (1772-1823) came up with the law
of comparative advantage
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, 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
Ricardo's theory implies that comparative advantage rather than absolute
advantage is responsible for much of international trade. Ricardo considered
what goods and services countries should produce, and suggested that they
should specialise by allocating their scarce resources to produce goods and
services for which they have a comparative cost advantage
A comparative advantage - gives a company the ability to sell goods and services at
a lower price than its competitors and realize stronger sales margins.Comparative
advantage is the basis for all trade between individuals, regions, and nations There are
possible gains from trade with absolute advantage, the gains may not be mutually
beneficial. Comparative advantage focuses on the range of possible mutually beneficial
exchanges.
The ability of a firm or individual to produce goods and/or services at a lower
opportunity cost than other firms or individuals. A comparative advantage gives a
company the ability to sell goods and services at a lower price than its competitors
and realize stronger sales margins.

 The theory of comparative advantage is an economic theory about the

potential gains from trade for individuals, firms, or nations that arise from
differences in their factor endowments or technological progress. In an economic
model, an agent has a comparative advantage over another in producing a
particular good if he can produce that good at a lower relative opportunity
cost or autarky price, i.e. at a lower relative marginal cost prior to trade.

Opportunity Cost
The loss of potential gain from other alternatives when one alternative is chosen

The theory of comparative advantage is essentially the idea that even though one
entity may be better at producing a good than a second entity, it still may be
beneficial to trade with the second entity if they have lower opportunity costs.
A person has a comparative advantage if s/he can produce something at a lower
cost than others this is not the same as being the best at something. Those with
absolute advantages can buy goods and services from businesses who produce them
at a comparatively lower cost.

For example,

Consider again Country A and Country B. The opportunity cost of producing 1 unit of clothing
is 2 units of food in Country A, but only 0.5 units of food in Country B. Since the opportunity cost
of producing clothing is lower in Country B than in Country A, Country B has a comparative
advantage in clothing Thus, even though Country A has an absolute advantage in both food and
clothes, it will specialize in food while Country B specializes clothing. The countries will the
trade, and each will gain Absolute advantage important, but comparative advantage is what
determines what a country will specialize in.