Background Note | HBS Case Collection | June 1996 (Revised November 1996)

Economic Gains from Trade: Comparative Advantage

by Robert E. Kennedy and Nancy F. Koehn

Abstract

How nations trade 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 principles most widely accepted among professional economists. Despite this wide acceptance in the professional community, the basics of international trade are still poorly understood by many policy makers and casual commentators. This note introduces the theory of comparative advantage. It is divided into four sections. The first presents a short history of the concepts behind comparative advantage. The second develops a simple model with several examples to demonstrate the gains that result from trade between nations. The third briefly covers several extensions of the simple model. Finally, two traditional objections to free trade are reviewed. A rewritten version of an earlier note.

Keywords: Business Model; Microeconomics; Trade; Cost Management; Business and Government Relations;

Citation:

Kennedy, Robert E., and Nancy F. Koehn. "Economic Gains from Trade: Comparative Advantage." Harvard Business School Background Note 796-183, June 1996. (Revised November 1996.)