David Ricardo Theory Of Comparative Advantage

The theory of comparative advantage was first introduced in 19th century under the liberal theories of political economy by an English political-economist, David Ricardo. The theory is a part of liberal perspectives, which largely governed today’s economy. Before the comparative advantage concept introduced, Adam Smith’s theory of absolute advantage was the foundation for analyzing how countries conduct trade with each other. He stated in The Wealth of Nations (1776) that a country will benefit from trades if it exports products that have an absolute advantage (for example: lower production cost than another country), and then imports products that have higher production cost than another country. In the contrary, Ricardo argued that benefit can not only be gained by a country with an absolute advantage, because trade can also benefit a country which exports products with higher production cost than another country which produce the same products.

In the Principles of Political Economy and Taxation (1817), Ricardo wrote that the gains from trade do not depend on a country or an individual having an absolute advantage. In brief, Ricardo pleaded that international trade based on comparative advantage will benefit all countries involved. His original example is the trade between England and Portugal. Here, the

For example, as a capital-abundant country, India has to disfavor the labor-abundant industry, such as furniture. Therefore, there will be decreases in the furniture industry, not only will the workers lose their job, but the return on investment will also decline. The important contribution in the analysis of consequences of free trade for a country was set by Wolfgang Stolper and Paul Samuelson in 1941, and known as the Stolper-Samuelson