Economic tenet formulated by David Ricardo, also Law of Association
The law or principle of comparative advantage holds that under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage. Comparative advantage is the economic reality describing the work gains from trade for individuals, firms or nations, which arise from differences in their factor endowments or technological progress. In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. One does not compare the monetary costs of production or even the resource costs (labor needed per unit of output) of production. Instead, one must compare the opportunity costs of producing goods across countries.
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Articles
Explaining Commerce to the Commerce Secretary, by Colin Grabow, Inu Manak, 14 Dec 2017
Criticizes Commerce Secretary Wilbur Ross for his comments about the Korea-U.S. Free Trade Agreement, showing he "forgets some basic lessons of international trade"
Criticizes Commerce Secretary Wilbur Ross for his comments about the Korea-U.S. Free Trade Agreement, showing he "forgets some basic lessons of international trade"
[Ricardo's] example highlights an important element of comparative advantage. First, even if one country is the best at everything (in other words, has an absolute advantage), it is still better served by focusing on what it produces best, and importing the remaining items. Why? Because an absolute advantage does not necessarily equal a comparative advantage, as the latter is based on the opportunity cost of making one thing over another ... Essentially, comparative advantage allows for greater investment in the thing you are good at, and in turn, makes you better at it over time.
Related Topics: Free trade, David Ricardo
Free Trade, by Alan S. Blinder, The Concise Encyclopedia of Economics, 2008
Presents the case for free trade by pointing out various protectionist arguments which are mistaken or fall short of their presumed benefits
Presents the case for free trade by pointing out various protectionist arguments which are mistaken or fall short of their presumed benefits
Some lawyers are better typists than their secretaries. Should such a lawyer fire his secretary and do his own typing? Not likely. Though [he] may be better ... at both arguing cases and typing, he will fare better by concentrating his energies on the practice of law ... The same idea applies to nations. Suppose the Japanese could manufacture everything more cheaply than we can ... Even in this worst-case scenario, there will ... be some industries in which Japan has an overwhelming cost advantage (say, televisions) and others in which its cost advantage is slight (say, chemicals).
Is Free Trade Obsolete? Part 1, by Sheldon Richman, Freedom Daily, Apr 2004
Critiques a Paul Craig Roberts and Charles Schumer article arguing against free trade due to a "new economic era", introducing first the law of comparative advantage
Critiques a Paul Craig Roberts and Charles Schumer article arguing against free trade due to a "new economic era", introducing first the law of comparative advantage
To explain this, we have to go back to one of the most important contributions to economic theory, David Ricardo's law of comparative advantage, which the late Murray Rothbard called "indispensable to the case for free trade." ... The question Ricardo was addressing was whether a group of people (such as a country) would have an economic interest in trading with another group even if the first was more efficient than the second at producing all goods. If the answer is yes, then it can be shown that free trade benefits both groups and, by implication, all participants in the international division of labor.
Is Free Trade Obsolete? Part 2, by Sheldon Richman, Freedom Daily, May 2004
After providing a numerical example of the law of comparative advantage, defends it from the argument (made by Roberts and Schumer) that movable factors of production make the law no longer applicable
After providing a numerical example of the law of comparative advantage, defends it from the argument (made by Roberts and Schumer) that movable factors of production make the law no longer applicable
Ricardo's law of comparative advantage, operating through the price system and the phenomenon of opportunity cost, induces people and groups to specialize in the production of things they are "most best" at making and buy the rest of what they want from other people ... Imagine countries A and B, each of which can produce two products of comparable quality, wine and bread ... Given these facts, it doesn't pay B to make wine. Better to specialize in bread and trade for wine. Likewise, A will be better off specializing in wine and trading for bread.
Mises: Defender of Freedom, by George Reisman, Mises Daily, 29 Sep 2006
Written on the 125th anniversary of his birth, describes several of Mises' contributions to economics theory and other areas, along with some of Reisman's personal reminiscences
Written on the 125th anniversary of his birth, describes several of Mises' contributions to economics theory and other areas, along with some of Reisman's personal reminiscences
In a major elaboration of Ricardo's Law of Comparative Advantage, Mises showed that there is room for all in the competition of capitalism, even those of the most modest abilities. Such people need only concentrate on the areas in which their relative productive inferiority is least ... Mises showed that a harmony of interests prevails in this case, too. For the existence of the janitor enables more talented people to devote their time to more demanding tasks, while their existence enables him to obtain goods and services that would otherwise be altogether impossible for him to obtain.
Protectionism and Unemployment, by Hans F. Sennholz, The Freeman, Mar 1985
Discusses why foreign and domestic trade are both beneficial, mercantilism and neo-mercantilism, the groups wanting tariffs and protectionism, the effects of trade restrictions on labor, the factors affecting industry competitiveness and more
Discusses why foreign and domestic trade are both beneficial, mercantilism and neo-mercantilism, the groups wanting tariffs and protectionism, the effects of trade restrictions on labor, the factors affecting industry competitiveness and more
Adam Smith already taught that it is advantageous for a country to specialize in the production of those goods in which it has a cost advantage. David Ricardo added the law of comparative cost according to which it also is advantageous to a country to specialize in those items in which it has a comparative advantage. To reap the advantages of an international division of labor a country may concentrate on production with greatest comparative advantage, importing even some items that can be produced at lower cost at home than abroad.
The Ricardian Law of Association, by Ludwig von Mises, Human Action, 1949
Chapter 8 "Human Society", section 4; discusses how all people benefit when they cooperate with each other and how the division of labor results in greater productivity
Chapter 8 "Human Society", section 4; discusses how all people benefit when they cooperate with each other and how the division of labor results in greater productivity
Ricardo expounded the law of association in order to demonstrate what the consequences of the division of labor are when an individual or a group, more efficient in every regard, cooperates with an individual or a group less efficient in every regard. He investigated the effects of trade between two areas, unequally endowed by nature ... It is advantageous for the better endowed area to concentrate its efforts upon the production of those commodities for which its superiority is greater, and to leave to the less endowed area the production of other goods in which its own superiority is less.
Related Topic: Free trade
We Need Real Free Trade Now, by Sheldon Richman, 4 Feb 2004
Responds to an article by Paul Craig Roberts and Senator Charles Schumer arguing that free trade is no longer tenable due to outsourcing of jobs to Asian countries made possible by the "easy mobility of software and data"
Responds to an article by Paul Craig Roberts and Senator Charles Schumer arguing that free trade is no longer tenable due to outsourcing of jobs to Asian countries made possible by the "easy mobility of software and data"
[T]he law of comparative advantage ... states that everyone will find it to his advantage to specialize in making the goods he's best at and trade for rest. This is true for people who are highly efficient at many lines of work. Even they will be better off if they concentrate on what they are "most best" at and leave the rest to others. (That is why a dentist hires a hygienist to clean teeth.) Roberts and Schumer insist this law operates only when capital cannot easily move to other countries. Otherwise the law is kaput. They say this, but they do not demonstrate it.
Related Topics: Free trade, Government
The introductory paragraph uses material from the Wikipedia article "Comparative advantage" as of 18 Nov 2018, which is released under the Creative Commons Attribution-Share-Alike License 3.0.