Society, Politics & Law
  • Video
  • 5 mins
  • Level 1: Introductory

60 second adventures in economics: The Principle Of Comparative Advantage

Updated Tuesday 18th September 2012

Why do countries sign free trade agreements? It's not just because they get to keep the pens, but to try to take advantage of their comparative advantage. 

Transcript: Whether you think economies work best if they're left alone or that governments need to do something to get them working, the one thing that can’t be controlled is the rest of the world.

Fear of foreign competition once led countries to try and produce everything they needed, and impose heavy taxes to keep out foreign goods.

However, economist David Ricardo showed that international trade could actually make everyone better off, bringing in one of the first great economic models.

He pointed out that, even if a country can produce pretty much everything at the lowest possible cost, with what economists call an ‘absolute advantage, it's still better to focus on the products it can make most efficiently – that sacrifice the least amount of other goods - and let the rest of the world do the same.

By specialising, they can then export these surpluses to each other and both end up better off.

This is the principle of comparative advantage – and it has persuaded many countries to sign up to free-trade agreements, but unfortunately, it can take a long time for countries to trade their way to prosperity.

And because it‘s now much easier to move to where the money is – it’s increasingly not only goods that cross borders, but people - which has somewhat uprooted Ricardo’s theory.

 

For further information, take a look at our frequently asked questions which may give you the support you need.

Have a question?

Other content you may like

How would post-Brexit trade deals actually work? Creative commons image Icon European Parliament Flickr under Creative Commons BY-NC-SA 4.0 license article icon

Society, Politics & Law 

How would post-Brexit trade deals actually work?

How realistic is the idea that Britain will make a Free Trade Agreement with the EU if we leave the EU?

Article
Developing countries in the world trade regime Copyrighted image Icon Copyright: Used with permission free course icon Level 3 icon

Society, Politics & Law 

Developing countries in the world trade regime

Free trade or fair trade? This free course, Developing countries in the world trade regime, will help you to analyse the relationship that exists between developed and developing countries under the World Trade Organization regime of Development Round negotiations. The current world trade regime has a very mixed record in promoting growth and reducing poverty.

Free course
8 hrs
Your guide to the Visible Trade data visualisation tool article icon

Money & Business 

Your guide to the Visible Trade data visualisation tool

Our data visualisation of the UK's trade with the world can seem a bit daunting at first - so we've got this video and text guide to show you how to get the best from it...

Article
The Big Question: What is free trade? Copyrighted image Icon Copyright: photos.com article icon

TV, Radio & Events 

The Big Question: What is free trade?

A solution to the world's ills, or a way of keeping poor nations poor?

Article
Greening The Net: Introduction Copyrighted image Icon Copyright: Production team article icon

Nature & Environment 

Greening The Net: Introduction

International environmental organisations are using the Internet to connect their members across the world and to co-ordinate their campaigns

Article
The Crimea adventure exposes Russia's wobbly economy Copyrighted image Icon Copyright: Andreykr | Dreamstime.com article icon

Society, Politics & Law 

The Crimea adventure exposes Russia's wobbly economy

Although Crimea might look like a victory for Vladimir Putin's Russia, a closer look shows an economically exposed nation, says Alan Shipman.

Article
60 second adventures in economics: Rational Choice Theory Creative commons image Icon The Open University under Creative Commons BY-NC-SA 4.0 license video icon

Society, Politics & Law 

60 second adventures in economics: Rational Choice Theory

People are pretty rational. But not quite rational enough for the good of the economy.

Video
5 mins
Making manufacturing motor Creative commons image Icon Wigwam Jones under CC-BY-NC-ND licence under Creative-Commons license article icon

Society, Politics & Law 

Making manufacturing motor

Using the motor industry as an example, Leslie Budd considers the role of manufacturing during the recession.

Article
Evan Davis on... hindsight Copyrighted image Icon Copyright: photos.com video icon

Society, Politics & Law 

Evan Davis on... hindsight

The Bottom Line presenter Evan Davis discovers that you find out more about psychology when you ask about hindsight.

Video
5 mins