THE CONCEPT OF comparative advantage is perhaps the single most powerful idea in economics. It is taught to every undergraduate and printed in every introductory textbook. It has all the hallmarks of a great theory: simple, non-obvious, logically irrefutable, with sweeping implications. And adherence to it promises a better world.
Never expressed better than by David Ricardo, its originator, the theory states that even if England is more efficient than Portugal at producing both textiles and wine, but Portugal is relatively better at producing wine than textiles, both countries would prosper if England produced all the textiles needed by the two countries and Portugal all the wine. The idea is to allow free markets to allocate resources to the sector(s) in which a nation has a relative productivity advantage and then trade freely to enjoy the benefits. In turn, free trade nudges the economy to concentrate on its comparative advantage.
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