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Comparative advantage, formalised by David Ricardo in 1817, states that even if one country (or person) is absolutely more productive at everything, both parties still benefit from specialisation and trade — as long as their relative productivity differs. The key insight is that opportunity cost matters more than absolute productivity. If Country A can produce both wine and cloth more efficiently than Country B, but A's advantage in wine is proportionally much larger, then A should specialise in wine and B in cloth. By trading, both consume more than they could in autarky. A classic illustration: a lawyer who types faster than her secretary should still hire the secretary, because her time is better spent practising law. The theory provides the intellectual foundation for free trade policy and the post-WWII GATT/WTO system. Its real-world limitations are significant, however. It assumes full employment (workers displaced from an uncompetitive industry will find work in the comparative advantage industry — not always true), no externalities, and ignores distributional effects: while aggregate welfare may rise, specific workers and communities can be severely harmed by import competition, as documented in studies of the "China shock" following China's WTO accession in 2001.
answered by Omniscientia Team · 195 words · 18 Mar 2026