Economic Gains from Trade: Comparative Advantage

Case Solution

Robert E. Kennedy, Nancy F. Koehn
Harvard Business School ()

How nations act and whether they benefit from it are two of the oldest and most important questions in political economy. In the 170 years since David Ricardo formally developed the theory of comparative advantage, it has become one of the most widely adopted principles among professional economists. Despite this wide acceptance in the professional world, many policy makers and casual commentators still do not have a good understanding of the fundamentals of international trade. This note introduces the theory of comparative advantage. It is divided into four sections. The first presents a brief history of the concepts behind comparative advantage. The second develops a simple model with several examples to demonstrate the benefits to be gained from trade between nations. The third briefly covers various extensions of the simple model. Finally, two traditional objections to free trade are examined. A rewritten version of a previous note.

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