Term · Trade
Comparative advantage
Being able to produce something at a lower opportunity cost than someone else. Trade pays when each side specialises in what it gives up least to make, even if one side is better at everything.
Example
A lawyer who types faster than her assistant still gains by hiring him. Every hour she spends typing is an hour of legal work she gives up.
Ricardo’s example
Portugal needs fewer workers for both goods, yet both countries end up with more when England makes cloth and Portugal makes wine. Source 1
| Workers needed for a year | Cloth | Wine |
|---|---|---|
| England | 100 specialises | 120 |
| Portugal | 90 | 80 specialises |
Common confusion: comparative ≠ absoluteYou can be worse at everything and still gain from trade.
1Primary source · 1817On the Principles of Political Economy and TaxationDavid Ricardo · Chapter 7, “On Foreign Trade” (England, Portugal, cloth and wine)