Theory of Comparative Advantage

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. Moreover, the comparative advantage of nations may change over time as a result of technological change.

A question may arise here. If a country has absolute advantage in all products and the other country is absolutely less productive, then wouldn’t international trade occur? According to David Ricardo, there is no need to rely international trade on absolute advantages. The key word here is comparative, meaning ‘relative’ and ‘not necessarily absolute’. They both can gain by trading with each other as long as their relative disadvantages in making different goods are different. A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country; alternatively, when the relative productivity between goods  is the highest compared with another country.