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no goods in which it has no absolute advantages (McDonald and Burton,
2002).

3.5.6 Comparative Advantage

The function of the comparative advantage theory is to explain why trade

takes place. David Ricardo first described the theory of comparative
advantage (classical theory) in 1817 in his book ‘Principles of Political
Economy and Taxation’. Although another great classical economist, John

Stuart Mill, modified it, it still provides the foundation of our theory of
international trade today. Ricardo expanded the theory of absolute

advantage by providing a major insight into reasons why countries trade
with one another, when one country can produce all products at an

absolute advantage. Ricardo’s theory argues that benefits can still be
gained from trade if a country specialises in those products it can produce
more efficiently, regardless of whether other countries can produce the

same products even more efficiently. In other words, the theory maintained
that a country can benefit from trade even if it is unable to establish an

absolute advantage in any goods. Note that the concept of opportunity
cost is crucial to an understanding of the law of comparative advantage
and thus the case of trade. According to Ricardo, the cost of producing an

output is measured in terms of consumed resources (Woods, 2001).

A question arises: would there still be benefits to be gained from trade if a
single country was more efficient at producing all products (i.e. the same

country had an absolute advantage in all products)? In 1817, David
Ricardo examined this question and found that trade was still beneficial

even when the same country was better at producing all goods. According
to McDonald and Burton (2002) the theory offers a supply-side
demonstration that it may be advantageous to a country to import goods

even if its producers are absolutely more efficient in their production. David
Ricardo succeeded in giving an explanation of why trade occurs and in

what commodities, but failed to explain why labour productivity should
differ, and neglected the demand side of market transactions. The theory
also did not take into account the conditions of market turbulence in which

international companies operate. Rapid change is a characteristic of many