The prinicple of comparative advantage suggests that society benefits from specialisation and free trade.

David Ricardo developed the principle of comparative advantage. Heckscher, Ohlin and Samuelson then later developed the theory. They all argued that all countries have different factor endowments of labour, land and capital inputs. Countries should be able to specialise in and export products that they can effectively produce. Comparative advantage dictates that international trade happens when there are differences in the price of production. World trade is the result of non-price competition between countries.

The gains of specialisation depend on comparative advantage. World production can always be increased if trade takes place between countries, which have different relative efficiencies in the production of any goods or services. If each concentrates on those commodities in which it is relatively more efficient, or relatively less inefficient, a gain is there for the taking.

Without comparative advantage, there is no reallocation of resources within countries that will increase total world production. Below is a table to demonstrate comparative advantage before specialisation has taken place.

English: Comparative advantage Dansk: Komparativfo...

English: comparative advantage in economics

English: Equation of the Revealed Comparative Adva...

Pre-SpecialisationCD PlayersPersonal Computers

UK2,000500

Japan4,0002,000

Total Output6,0002,500

To decide which country should specialise in a particular product we need to look at the information in the table above and analyse the internal opportunity cost for each country. For example, if the UK were to put more resources into higher output of personal computers, the opportunity cost of each extra PC would be four CD players. Japan has the same decision to make, as the opportunity cost would be two CD Players. It is therefore clear that Japan has the comparative advantage in PCs.

If Japan reallocated its resources into CD players; the opportunity cost of one extra CD player is ½ of a PC. For the UK the opportunity cost is ¼ of the PC. So the UK has the comparative advantage in CD players. Below...