The Theory of Comparative Advantage

Defending Against Skeptics:
The True Meaning and Intuition of the Theory of Comparative Advantage
Many people who learn about the theory of comparative advantage quickly convince themselves that its ability to describe the real world is extremely limited, if not non-existent.

A Direct Test of the Theory of Comparative Advantage: ..

First, the principle of comparative advantage is clearly counter-intuitive.

15 Important Criticism of Comparative Advantage Theory …

Advantageous trade based on comparative advantage, then, covers a larger set of circumstances while still including the case of absolute advantage and hence is a more general theory.

15 Important Criticism of Comparative Advantage Theory In ..

In this way, we might raise the well-being of all individuals despite differences in relative productivities. In this description, we do not predict that a result will carry over to the complex real world. Instead, we carry the logic of comparative advantage to the real world and ask how things would have to look to achieve a certain result (maximum output and benefits). In the end, we should not say that the model of comparative advantage tells us anything about what happen when two countries begin to trade; instead, we should say that the theory tells us some things that happen.

The original idea of comparative advantage dates to the early part of the 19th century.

Ricardo and comparative advantage at 200 | VOX, …

Interpreting the Theory of Comparative AdvantageThe garden story offers an intuitive explanation for the theory of comparative advantage and alsoprovides a useful way of interpreting the model results.

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The following story is meant to explain some of the insights within thetheory of comparative advantage by placing the model into a more familiar setting.

The price of each country's comparative advantage good will be lower than the priceof the same good in the other country.

Theory of Comparative Advantage, ..

Using the model, one can show that in autarky each country will produce some of each good. Because of the technology differences, relative prices of the two goods will differ between countries. The price of each country’s comparative advantage good will be lower than the price of the same good in the other country. If one country has an absolute advantage in the production of both goods (as assumed by Ricardo), then real wages of workers (i.e., the purchasing power of wages) in that country will be higher in both industries compared to wages in the other country. In other words, workers in the technologically advanced country would enjoy a higher standard of living than in the technologically inferior country. The reason for this is that wages are based on productivity; thus in the country that is more productive, workers get higher wages.

Finally, the theory of comparative advantage is all too often presented only in its mathematical form.

Theory Of Comparative Advantage Examples

Note that trade based on comparative advantage does not contradict Adam Smith’s notion of advantageous trade based on absolute advantage. If, as in Smith’s example, England were more productive in cloth production and Portugal were more productive in wine, then we would say that England has an absolute advantage in cloth production, while Portugal has an absolute advantage in wine. If we calculated comparative advantages, then England would also have the comparative advantage in cloth and Portugal would have the comparative advantage in wine. In this case, gains from trade could be realized if both countries specialized in their comparative and absolute advantage goods. Advantageous trade based on comparative advantage, then, covers a larger set of circumstances while still including the case of absolute advantage and hence is a more general theory.

What in contrast, is Palley’s (2008) observation regarding the modern view of comparative advantage?

Comparative advantage - Wikipedia

Instead we carry the logic of comparative advantage to the real world and ask how things would have to look to achieve a certain result (maximum output and benefits).