Theory of Comparative Advantage

The theory of comparative advantage, first developed by English economist David Ricardo in 1817, is a theory about the potential gains from trade for companies, countries or people that arise on account of differences in factor endowments or technological progress.

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2. Definition The theory of comparative advantage, first developed by English economist David Ricardo in 1817, is a theory about the potential gains from trade for companies, countries or people that arise on account of differences in factor endowments or technological progress.

3. Ricardo has explained the theory with the following assumptions: There is free trade There is no transport cost Labour is homogeneous Cost of production is expressed in terms of labour Production is subject to constant returns to scale

4. Types of cost difference in production: Equal cost difference Absolute cost difference Comparative cost difference

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