Comparative advantage

Comparative advantage is the circumstance or opportunity of welfare improvement afforded by allocating one's labor and other resources amongst one's available opportunities. The allocation is generally performed in the context of trade opportunities and realizable prices. When re-allocation occurs prices usually change. The optimal allocation is not necessarily extreme specialization that excludes all but one productive activity. Comparative advantage is distinct from competitive advantage and absolute advantage.

A very early use of the term comparative advantage appears in An Essay on the External Corn Trade by Robert Torrens (economist) in 1815.

David Ricardo 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 (albeit with the assumption that the capital and labour do not move internationally), 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. Widely regarded as one of the most powerful yet counter-intuitive insights in economics, Ricardo's theory implies that comparative advantage rather than absolute advantage is responsible for much of international trade.