The concept of comparative advantage was first formulated by economist david ricardo as an explanation of the benefits of international trade for countries his theory concluded that a country could increase its income by specializing in certain products and services and selling these on the international market businesses also may have a comparative advantage over their competitors resulting from certain assets, skills or geographical and historical factors. It wasn't until british economist david ricardo arrived at the concept of comparative advantage in the early 19 th century that the real benefits of international trade were discovered.
Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another this means a country can produce a good relatively cheaper than other countries the theory of comparative advantage states that if countries specialise in producing goods where they. Paper: bccadoc abstract benefits and costs of following comparative advantage alan v deardorff the university of michigan this paper is the text of a lecture given on november 20, 1997 to inaugurate the john w.
So to see how trade can actually benefit both of them, we shall introduce the concept of comparative advantage comparative advantage an important aspect that is omitted if we only look at absolute advantages is the presence of opportunity costs. Static comparative advantage a developing economy, in sub-saharan-africa, may have a comparative advantage in producing primary products (metals, agriculture), but these products have a low-income elasticity of demand, and it can hold back an economy from diversifying into more profitable industries, such as manufacturing.
If both countries specialize in the good for which they have a comparative advantage then trade, the terms of trade for a good (that benefit both entities) will fall between each entities opportunity costs.