The theory of comparative advantages is an economic model showing the benefits of trade for two analyzed countries, neither of which has absolute advantages. Relations between countries of different levels of development create economic ties of varying degrees of maturity, so Smith’s theory becomes inoperative (Gnangnon, 2020). David Ricardo’s theory uses the concept of an alternative price. It consists of the working time that is needed to create one unit of production. Moreover, it is compared with the corresponding indicator when creating a similar product in another country.
Therefore, the theory of relative advantages states that the favorable opportunity cost of the product allows a country to specialize in it even in the absence of absolute advantages. If the production of two goods for two countries, according to Smith’s theory, is considered, only the one with the necessary number of factors of production will benefit. Ricardo showed that with a favorable production price, the situation could change for both countries. Despite the absolute advantages of one of the two countries, the second can also specialize in producing a similar product, provided that the production costs are proportionate.
Such an exchange is beneficial for both countries since their needs for goods will be satisfied at the same level, but the labor costs for producing this volume of products will be reduced. The theory of comparative advantages is valid for any number of countries and any number of goods. The concept explains international trade and proves the existence of benefits from world trade for all participating countries.
Reference
Gnangnon, S. K. (2020). Comparative advantage following (CAF) development strategy, aid for trade flows and structural change in production. Journal of Economic Structures, 9(1), 1-29.