- even though smith’s theory of absolute advantage serves as the fundamental theory of international trade, it fails to explain when one of the two nations has an absolute advantage (or disadvantage) in both goods.
- if a nation is more efficient than its trading partner in the production of all commodities, then international trade will not happen based on smith’s theory.
- davidricardo did not object smith’s theory of absolute advantage. In fact, he additionally explained that international trade and mutual benefits from trade can still exist even if one country has an absolute advantage in the production of all goods.
- in 1817, ricardo published ‘principles of political economy and taxation’ in which he developed the theory of comparative advantage.
- ricardo argued that even if one nation is less efficient than (has absolute disadvantage with respect to) the other nation in the production of both commodities, there is still a basis for mutually beneficial trade since it still must be relatively more efficient than the other country in one commodity’s production than the other.
- a nation should specialize in the production of and export the commodity in which its absolute disadvantage is smaller.
- each nation would then possess comparative advantage in the production of one of the two commodities, and both nations would then benefit by specializing in one commodity and trading for the other.