Theory of comparative advantage

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The Law of Comparative Advantage is an economic principle relating to foreign trade. It applies to a situation where one country, such as China, can produce each of several goods more efficiently than another country, such as the United States.

If the lower-cost country (China) can produce one of those goods more efficiently than it (China) can produce the other goods, then the Law of Comparative Advantage holds that it (China) should devote its resources to producing its most-efficient good and trade with the other country to obtain the other goods.

This is a surprising result, because it results in the lower-cost country (China) buying goods from another country that the lower-cost country (China) could produce more cheaply. But the adage "do what you do best" leads to this result.

David Ricardo first developed the Law of Comparative Advantage.


Suppose this is how much in resources it costs the Yankees and Mets to produce great pitchers or outfielders:

Yankees Mets
outfielders 10 resource units 5 resource units
pitchers 9 resource units 3 resource units

Even though the Mets can produce outfielders more efficiently than the Yankees can, the Mets are better off spending all their resources developing pitchers and then trading with the Yankees to obtain outfielders.