Skip to content
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
60 second adventures in economics: The Invisible Hand Copyrighted image Icon Copyright: The Open University video icon

Society, Politics & Law 

60 second adventures in economics: The Invisible Hand

In the first of our six short videos on economic theory, watch how an Invisible Hand drives the economy. Eventually.

Video
5 mins
Fair trade matters Copyrighted image Icon Copyright: net_efekt under CC-BY-NC-SA licence article icon

Society, Politics & Law 

Fair trade matters

Fairtrade is an example of two broader, long-term trends: global governance and social enterprise.

Article
Budget 2016: The Experts Respond Creative commons image Icon Ian Muttoo under Creative Commons BY-SA 4.0 license article icon

Society, Politics & Law 

Budget 2016: The Experts Respond

Earlier today, George Osborne delivered his latest budget, against a backdrop of increasing problems. A panel of experts share their first reactions.

Article
Giddens and me Copyrighted image Icon Copyright: Sue Hemmings article icon

Society, Politics & Law 

Giddens and me

Sue Hemmings revisits the economics text books of her 1970s student days, re-reading them from a 21st century perspective.

Article