Why Countries Trade: The Theory of Comparative Advantage

6 Pages Posted: 5 Apr 2010 Last revised: 12 Apr 2019

See all articles by Peter Marcel Debaere

Peter Marcel Debaere

University of Virginia - Darden School of Business; Centre for Economic Policy Research (CEPR)

Abstract

The theory of comparative advantage is a surprisingly common-sense idea, but it is often misunderstood. In this technical note the basic theory of comparative advantage is presented with an example that drives home its logic when there are technological differences between countries. In addition, we look at some extensions that specify other sources of comparative advantage, as well as some related theories.

Excerpt

UVA-G-0594

Rev. Apr. 9, 2019

Why Countries Trade:

The Theory of Comparative Advantage

Increasing Trade

We live in an increasingly global economy. World merchandise exports as a share of world gross domestic product (GDP) have almost tripled since 1950, when they were 5% to 6%. Throughout most of the post–World War II period, trade has grown faster than output, and economies have become more open and integrated, especially since the 1990s. Despite the focus on globalization issues in recent years, not all aspects of globalization are unprecedented. As a matter of fact, before World War I, the world experienced significant international trade flows as well. Even so, trade liberalizations are not uncontroversial. Especially since the financial crisis of 2007, there has been renewed skepticism about the gains from trade liberalizations in the public domain, and a call for more protectionism, especially in the United States. Questions have arisen as to whether international trade is responsible for (most of) the rising income inequality, how it relates to the degradation of the environment, and whether trade undercuts labor standards. These concerns notwithstanding, economists often tend to defend free international trade with the theory of comparative advantage. Central to their defense is the belief that the gains from international trade are such that, at least in principle and in the long run, all parties involved can be better off. In this note, the basic theory of comparative advantage is presented with an example that drives home its basic logic when there are technological differences between countries. In addition, we look at some extensions that specify other sources of comparative advantage, as well as some of the imitations of the theories.

. . .

Keywords: international trade, comparative advantage, competition, trade, Rybczynski effect, Stolper-Samuelson result, Heckscher-Ohlin

Suggested Citation

Debaere, Peter Marcel, Why Countries Trade: The Theory of Comparative Advantage. Darden Case No. UVA-G-0594, Available at SSRN: https://ssrn.com/abstract=1583765

Peter Marcel Debaere (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/html/direc_detail.aspx?styleid=2&id=5794

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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