Comparative advantage

Comparative advantage is the ability to produce a good or service at a lower opportunity cost than another producer, even without higher absolute productivity.

Opportunity cost: The value of the best alternative forgone when a choice is made. Comparative advantage exists when one producer gives up less of another output to make a good.
Adam Smith: An eighteenth-century Scottish economist and philosopher whose work helped establish classical political economy. His argument for free trade emphasized absolute cost differences, setting up a question Ricardo later answered.
Absolute advantage: The ability to produce more of a good with the same resources, or the same amount with fewer resources. A producer can lack absolute advantage in every good yet still have comparative advantage in one.
International trade: The exchange of goods and services across national borders. Comparative advantage is a central explanation for specialization and exchange between countries.
Stolper–Samuelson theorem: A result linking changes in goods prices to changes in the real returns of production factors in the Heckscher–Ohlin model. It identifies how trade can raise some groups’ real incomes while lowering others’.
Production possibility frontier: A curve showing the maximum combinations of outputs an economy can produce with available resources and technology. Its slope at a production point expresses the opportunity cost used to compare producers.
David Ricardo: A British political economist whose theories shaped classical economics in the early nineteenth century. He formalized comparative advantage to explain gains from trade despite unequal productivity.
Autarky: An economic condition in which a country does not trade with other countries. Without trade, specialization cannot turn comparative cost differences into exchange gains.
Free trade: Trade across borders with few or no government-imposed barriers. Its economic case often rests on the gains from specializing by comparative advantage.
Compensation principle: The criterion that a change is potentially welfare-improving if winners could compensate losers and remain better off. Aggregate trade gains do not mean compensation actually occurs.

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