Comparative advantage and gains from trade

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.