Comparative advantage and gains from trade

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Definition

Comparative advantage and gains from trade combines the insights of comparative advantage and gains from trade to state that when two or more organizations can choose to freely trade the products (goods or services) created by their activities, each organization has the knowledge and incentives to concentrate on those activities where it has a comparative advantage.

When comparative advantage is considered in isolation from a utility-maximizing viewpoint, it only makes a statement that the total social utility generated is higher than what could be achieved under alternative allocations. In contrast, in the trading situation, it can be shown that working according to comparative advantage and then trading leads to a Pareto improvement, rather than merely a total utility gain, over other allocations, i.e., a situation where both the trading partners are better off.

References

Online articles explaining comparative advantage and gains from trade

Article Author Location Comment
Comparative Advantage: An Economics By Topic Detail Lauren F. Landsburg Library of Economics and Liberty Excerpts from and links to historically important writings (as well as recent online writings) on the subject
Comparative Advantage: Free Trade Benefits High-Paid U.S. Workers Dwight R. Lee The Freeman Discussion of comparative advantage (basic theory) and application to international trade
A Brief History of the Concept of Comparative Advantage Morgan Rose Library of Economics and Liberty Historical overview, and current context (as of 2001)
Comparative Advantage Donald Boudreaux Concise Encyclopedia of Economics, available online at the Library of Economics and Liberty Explanation with mathematical example of comparative advantage plus trade
Treasure Island. The Power of Trade. Part I Russell Roberts Library of Economics and Liberty A short story illustrating comparative advantage and trade.
Ricardo's Difficulty Idea Paul Krugman personal web space at MIT Discussion of why comparative advantage is hard to grasp
The Theory of Comparative Advantage -- Overview Steven Suranovic internationalecon.com An explanation of comparative advantage, its relation with and distinction from the concept of advantageous trade, and its interpretation.