Comparative advantage

Stated by David Ricardo, 1817

Economics — the classical case for international trade

The principle that two countries can both gain from trading even when one of them is better at producing everything, because what matters is not who is better in absolute terms but what each gives up to produce a thing — its opportunity cost. David Ricardo set it out in 1817 with the example of England and Portugal exchanging cloth for wine, and it remains the backbone of the economic case for open trade. It is also the classic example of a result that is true and genuinely surprising, which is why Paul Samuelson offered it when challenged to name one proposition in the social sciences that was both. The model's assumptions — that capital stays put, that labour is fully employed, that adjustment is painless — are where the modern arguments happen.

How to spot them

▸England and Portugal, cloth and wine, in a chapter titled 'On Foreign Trade'
▸A stockbroker turned MP who made a fortune on the outcome of Waterloo
▸Stanislaw Ulam's challenge to Paul Samuelson to name one true, non-trivial proposition in the social sciences
▸Opportunity cost, not absolute productivity: a country can be worse at everything and still have something to sell

Key facts

England and Portugal, cloth and wine, in chapter seven of an 1817 treatise on political economy and taxation (1817)

David Ricardo's On the Principles of Political Economy and Taxation, chapter 7, 'On Foreign Trade'

Robert Torrens stated the essential point two years earlier, in an 1815 essay on the corn trade (1815)

An Essay on the External Corn Trade; priority is sometimes given to Torrens

Paul Samuelson's answer when Stanislaw Ulam challenged him to name a social-science proposition both true and non-trivial

Samuelson said the answer was obvious once explained, but that no one had ever guessed it unaided

Heckscher and Ohlin explained the pattern instead by countries' endowments of land, labour and capital (1933)

The Heckscher–Ohlin model; Bertil Ohlin shared the 1977 Nobel Memorial Prize

Wassily Leontief found in 1953 that American exports were labour-intensive, the opposite of what the factor-endowment theory predicted (1953)

The Leontief paradox

Friedrich List's argument that a developing economy should shelter its infant industries first (1841)

The National System of Political Economy — the oldest sustained counter-argument

The 2013 'China shock' papers on American local labour markets and the cost of adjustment (2013)

Autor, Dorn and Hanson; gains from trade are aggregate, losses can be concentrated and lasting

Key ideas

Absolute advantage, Adam Smith's idea, is about who can produce a good with fewer resources. The comparative version is about what has to be given up: a country specialises where its opportunity cost is lowest.
The gains are real but distributional. The theory says total output rises; it says nothing about who receives it, which is why compensation and adjustment policy do the political work.
The classical model assumes capital is immobile between countries. Ricardo said so explicitly; critics point out that modern capital is not, which changes the conclusion.
It also assumes full employment and costless reallocation of workers between industries. Where those fail — as the China shock literature argues they did in parts of the American Midwest — the aggregate gain can coexist with severe local loss.

Quick-fire facts

•David Ricardo lived from 1772 to 1823; born in London to a Sephardi Jewish family, he made a fortune as a stockbroker, reputedly on government bonds around Waterloo
•He bought the parliamentary seat of Portarlington in Ireland and sat as an MP without ever visiting the constituency
•On the Principles of Political Economy and Taxation was published in 1817; the trade argument is in chapter 7
•Robert Torrens had given the substance of the argument in 1815
•Ricardo is also remembered for the law of rent, the labour theory of value, and Ricardian equivalence, named after him by Robert Barro in 1974
•The Heckscher–Ohlin model of 1933 explains trade by relative factor endowments; Bertil Ohlin shared the 1977 Nobel Memorial Prize with James Meade
•Wassily Leontief's 1953 finding that US exports were more labour-intensive than its imports is known as the Leontief paradox
•Paul Samuelson was the first American to win the Nobel Memorial Prize in Economic Sciences, in 1970
•Friedrich List's infant-industry argument of 1841 remains the standard case for protection in developing economies

Drill it — 8 cards

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Sources

David Ricardo — On the Principles of Political Economy and Taxation 1817; chapter 7, 'On Foreign Trade'
David H. Autor, David Dorn and Gordon H. Hanson — The China Syndrome: Local Labor Market Effects of Import Competition in the United States American Economic Review, 2013. Cited without URL.