Comparative Advantage

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ADDENDUM, 2024 — Readers interested in this topic may also wish to refer to a more recent and comprehensive paper – “'Every transaction in commerce is an independent transaction'. Ricardo on Foreign Trade” – published in 2023, which can also be downloaded from this site.

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Comparative advantage
Gilbert Faccarello∗
If there is at least one thing that modern economists associate with the name
of Ricardo, it is the principle of comparative advantage, which still today
forms the basis of the major part of the theories of international trade. It is
supposed to explain the direction of the flows of trade between countries and
determine the gains each country gets from its participation in international
exchanges. It forms also a powerful argument in favour of free trade between
nations. This principle is supposed to have been clearly stated for the first
time in a few paragraphs (Ricardo 1951–73 [hereafter referred to as “Works”]
I: 134–6) of Chapter 7, “On foreign trade” (ibid: 128–49), of Ricardo’s Prin-
ciples of Political Economy and Taxation – a chapter which, unlike the first
in particular, remained unchanged from the first edition of the book in 1817
to the third in 1821. While, curiously enough, these paragraphs have most
of the time been considered separately from the rest of the Principles, as a
kind of short parenthesis in Ricardo’s writings, they have nevertheless never
ceased to be examined and debated, and this created some confusion. A clear
understanding of the principle thus requires going back to the texts and an-
swering some simple questions (Faccarello 2015). How was it stated? How was
∗Published in The Elgar Companion to David Ricardo, Heinz D. Kurz and Neri Salvadori
(eds), Cheltenham: Edward Elgar, 2015, pp. 69–77.
ADDENDUM, 2024. Readers interested in this topic may also wish to refer to a more recent
and comprehensive paper – “’Every transaction in commerce is an independent transaction’.
Ricardo on Foreign Trade” – published in 2023, which can also be downloaded from this site.
1

Comparative advantage 2
it interpreted? Is it really a kind of foreign body in Ricardo’s theory or are
some links to be found with the author’s other ideas? As some questions of
authorship and vocabulary have been debated among scholars, they will also
have to be briefly alluded to.
A statement of the principle of comparative advantage
Towards the beginning of the seventh chapter of the Principles, Ricardo
introduces an exchange between two countries, England and Portugal, which
can produce two commodities: cloth and wine. England exports cloth to –
and imports wine from – Portugal, and Portugal exports wine and imports
cloth (Works I: 134–5). A specific exchange ratio is supposed to take place
between these two countries: aunits of Portuguese wine are exchanged for b
units of English cloth. It is also stated that, had each country to produce these
very quantities of both commodities, Portugal would employ 80 and 90 units
of labour respectively to produce aunits of wine and bunits of cloth, while
England would need respectively 120 and 100 units of labour to produce them.
According to the labour theory of value, these numbers, in each country, are
also the respective values of the quantities produced. The costs of production,
actual and potential – the “four magic numbers” as Samuelson called them –
are summarised in Table 1.
Table 1: The “four magic numbers” in Ricardo’s text.
aunits of wine bunits of cloth
Portugal 80 90
England 120 100
In spite of the fact that Portugal has an absolute advantage – i.e., smaller
real costs – in the production of both commodities, and England no absolute
advantage at all in any commodity, Ricardo supposes that this exchange is
nevertheless possible and actually happens. This is because, Ricardo states,
each country has a greater relative facility of production in one commodity:

Comparative advantage 3
wine is relatively less expensive to produce than cloth in Portugal, and cloth
relatively less expensive to produce than wine in England.
What happens here between nations is the same than what happens be-
tween two individuals. Adapting an example from the Wealth of Nations in
which Smith presents the advantages of a division of labour between a tailor
and a shoemaker (WN IV.ii: 456–7) before generalising the case to countries,
Ricardo reports the case of two men making shoes and hats, one of them hav-
ing a greater productivity in both productions but being however relatively
more productive in making shoes than hats (Works, I: 136n). In this case, he
stresses, it is in the interest of the first to specialise in shoes and buy hats
from the second, the reverse being advantageous to the second. It is the same
in the interest of countries, as in the case of individuals, not to attempt to
produce everything at home but instead to specialise in some production and
to exchange. The direction of trade and specialisation is thus given by the
comparison of the relative costs of production of the commodities in the two
countries.
These relative costs can be expressed through ratios. These ratios can-
not formally be found in Ricardo. They are advanced by James Mill in his
Elements (1821: 88) – who also sometimes spoke of “the purchasing power of
one commodity with respect to another” in each country (James Mill 1824: 118,
1827: 124). In the above example, the relative costs of production of aunits
of wine and bunits of cloth are 80/90 ≃0,9in Portugal and 120/100 = 1,2
in England. The relative cost of the production of wine is smaller in Portugal,
and the relative cost of cloth – the inverse ratio – is smaller in England. Hence
the rule: a country exports the commodity that is produced there with the
lower relative cost – this is what is called its “comparative advantage” – and
import the other one. Of course the exchange of commodities in which each
country has an absolute advantage is just a special case of this rule.
Ricardo also stresses an important aspect of this analysis. In the above
exchange between England and Portugal the product of 80 units of Portuguese
labour is exchanged for the product of 100 units of English labour. In inter-
national trade the labour theory of value thus does not seem to determine the
relative prices of commodities contrary to what happens in domestic exchanges
(Works I: 133). Why is it so? Because, Ricardo states, of the relative interna-
tional immobility of capital and labour, which stands in strong contrast with
their domestic mobility (Works I: 135–6).

Comparative advantage 4
The gains from trade and specialisation
According to Ricardo such an exchange between England and Portugal is not
only possible but profitable to both countries – and apparently possible because
profitable. For each country, the gains from trade are immediately determined:
they consist in the difference between the cost of production – here the units of
labour – the country would have spent in the home production of the quantity
of foreign commodity it imports and the cost of the quantity of the home
commodity it exports in exchange. Portugal’s gains from trade are thus of 10
units of labour – Portugal gives aunits of wine, the product of 80 units of
labour, for bunits of cloth for the home production of which it would have
spent 90 units. And England’s gains from trade are determined in a similar
way: they consist in 20 units of labour. Both countries can employ the units
of labour they save in the production of more wine or cloth or any other
commodity and, while the gains from trade are not equal on both sides, both
countries nevertheless can enjoy a greater amount of use values. In Ricardo’s
view the advantage that each country gets from free foreign trade is precisely
this: a better allocation and accumulation of capital and an increase in the
quantities of use values at its disposal. International trade never influences
directly the rate of profits – the influence can only be indirect, for example
when the importation of cheap corn from abroad reduces the cultivation of
pieces of land of worse quality at home, lowers the ground rent and favours
profits in consequence.
There is no doubt that Ricardo’s point of view is in line with what was
called – a bit hastily – “the eighteenth-century rule” (Viner 1937: 440) for
international trade. What are to be compared, the rule states, are not the
real costs of production of a given commodity at home and abroad (like in
the absolute advantage approach) but the domestic real costs of the imported
and the exported commodities: it is thus advantageous to import a foreign
commodity in exchange for a good domestically produced at a smaller real
cost than the production at home of the imported commodity would entail.
Ricardo however adds an important statement: this trade is beneficial to the
country even if the imported commodity could have been produced at home at
a smaller cost than it is produced abroad. Portugal imports cloth from England
though this cloth, the real cost of which is 100 units of labour in England,
could have been produced for 90 units at home. Ricardo’s innovation is thus
of importance. It shows that any country can participate in international

Comparative advantage 5
exchanges and benefit from them whatever the level of its costs. During two
centuries, this statement has been used as a powerful argument in favour of
free trade.
As regards specialisation, Ricardo generally supposes that, when constant
returns to scale prevail and there is no great difference in size between coun-
tries, international trade results in a complete specialisation of countries. He
recognises however that there could be cases of partial specialisation, for ex-
ample when one of the commodities traded – e.g., corn – is produced with an
increasing difficulty of production.
Authorship and vocabulary
The very fact that the considerations on the principle of comparative advantage
only takes up so small a space in Ricardo’s long and complex chapter on
foreign trade – and, moreover, seems not to be referred to in the rest of the
book and in Ricardo’s other writings – led some commentators to doubt that
it was formulated by Ricardo himself. The question of its paternity was thus
debated. Some authors advanced the view that the merit of the first statement
of the principle of comparative advantage should go to Robert Torrens – who
himself claimed for priority (Torrens 1826: vii). To support this opinion some
passages excerpted from The Economists Refuted (Torrens 1808: 37) and the
first edition of the Essay on the External Corn Trade (Torrens 1815: 263)
are quoted. Some other scholars however were inclined to put forth another
candidate: James Mill, and noted that some prefiguration of the principle was
contained in his Commerce Defended (J. Mill 1808: 108). Some even supposed
that Mill himself, whose role in assisting Ricardo to publish his magnum opus
is well known, added the principle in Ricardo’s book.
But while it is true that the three editions of his Elements of Political
Economy (1821, 1824, 1826) greatly contributed to the debates around the
principle and made it widely known, James Mill’s paternity certainly can
be discarded once we realize that he himself attributed the novelty of the
analysis to his friend (J. Mill to Ricardo, 18 November 1816, in Works VI: 99)
and that a reference to an exchange of wine and cloth between England and
Portugal – a feature of Ricardo’s celebrated example – can already be found
in Ricardo’s “Notes on Bentham” written in 1810–11 (Works III: 330). As for
Torrens’s claim, it must be noted that it relies on a few paragraphs that, in the

Comparative advantage 6
writings from which they are excerpted (Torrens 1808, 1815), are only inciden-
tal remarks and do not form a theoretical principle underlying the analysis.
Moreover Torrens later once implicitly recanted his claims. There is thus no
doubt today that Ricardo’s pages are the first full and clear statement of the
doctrine (on this intricate story see, for example, Maneschi 1998, Aldrich 2004
and Ruffin 2002, 2005).
Parallel to these attributional debates and linked to them, the question arose
of the origin of the phrase “comparative advantage” to designate a principle
for foreign trade. The words “comparative” or “comparatively” are extensively
used by Ricardo with the meaning of “relative”, for example when he writes
of the “comparative value” or “comparative quantity” of commodities. The
phrase “comparative advantage” itself is however not to be found in Chapter
7 on foreign trade but appears incidentally once, in the context of an open
economy, in Chapter 19, “On sudden changes in the channels of trade” (Works
I: 263). “Comparative disadvantage” is also used once, in Chapter 9, “Taxes
on raw produce” (ibid: 172). On the cost side of the question, and in relation
with international trade, the phrases “comparative difficulty of production”
and “comparative facility [of] production” are employed (ibid: 343 and 374
respectively).
James Mill, in his Elements of Political Economy, also writes of “compar-
ative facility” of production (J. Mill 1821: 84) and clearly contrasts “greater
absolute” to “greater relative, facility” of production (ibid, 87). He also speaks
of “peculiar advantages” with the meaning of comparative advantage (ibid,
84). It was Torrens who, in the third and fourth editions of his Essay on the
External Corn Trade (1826, 1827), started to clearly designate the doctrine
with the phrases “comparative advantage” or “disadvantage” (1826: vii) on the
one hand, and “comparative costs” (1827: 401) on the other. John Stuart Mill,
in his essay “Of the laws of interchange between nations, and the distribution
of the gains of commerce among the countries of the commercial world” uses
the phrase “comparative cost(s)” (J. S. Mill 1829–30: 233, 235–6, 254) and,
to speak of comparative advantage, writes of a commodity in which the “ad-
vantage is least” or the “advantage is greatest” (ibid: 233). In the subsequent
literature, both comparative advantage and comparative costs were used most
of the time interchangeably.

Comparative advantage 7
The traditional view: a different statement
of the principle of comparative advantage
The above presentation of the principle of comparative advantage is not the
one almost universally accepted since almost two centuries. It is relatively
new and while forming until now a kind of minority view, it is gaining ground
rapidly because it is more faithful to Ricardo’s writings. It is basically due
to Sraffa (1930) and was several decades later adopted by Ruffin (2002) and
Maneschi (2004). It challenges the traditional interpretation.
The tradition – still to be found in the textbooks of history of economic
thought or international economics – was first expressed by James Mill in the
three editions of his Elements of Political Economy (1821, 1824, 1826) and
in his article “Colony” (1825) written for a Supplement to the Encyclopædia
Britannica. It was subsequently powerfully restated by John Stuart Mill in his
already mentioned 1829–30 essay written a few years after Ricardo’s death and
published later in 1844 in his Essays on Some Unsettled Questions of Political
Economy. This approach was developed afterwards by generations of neoclas-
sical economists (on this history see, for example, Viner 1937 and Maneschi
1998). It went unquestioned and oriented all the debates until recently. While
at first sight the differences between the two interpretations seem to consist in
details of trifling importance, they lead in fact to widely diverging approaches.
According to James and John Stuart Mill’s approach, and while the analy-
sis is again conducted in real terms, the “four magic numbers” are interpreted
as the technical coefficients prevailing in the production processes in the two
countries – and consequently as the labour values of one unit of each commod-
ity in each country. Hence the following modified table, in which the countries
are first considered in autarky (Table 2).
Once the countries open to foreign trade, international exchanges ensue
following the indication given by the relative pre-trade costs. Except in the
unlikely case where no trade is possible because of identical relative costs in
both countries – a case considered by James Mill –, it is asserted that any
country can participate in international exchanges and benefit from them.
The difference with the first interpretation given above seems to be minor.
However the developments give a totally different flavour to the ensuing anal-
ysis and results. Ricardo’s statement of the principle started with an actual
exchange between England and Portugal. The relative price of the two com-

Comparative advantage 8
Table 2: The “four magic numbers” according to J. and J.S. Mill.
one unit of wine one unit of cloth
Portugal 80 90
England 120 100
modities was given – aunits of wine = bunits of cloth – and the gains from
trade for each country immediately determined in terms of saved resources.
Once however the “magic numbers” are interpreted as technical coefficients,
the questions of the determination of the quantities exchanged between the
two countries and of the exchange ratio at which trade is realised are still to
be answered and, from this point of view, Ricardo’s approach is allegedly in-
complete. The possible benefits – if any – each country gets from foreign trade
also depend on the answers given to these questions. This is the reason why,
in his 1829–30 essay, John Stuart Mill, considering different price-elasticities
of the countries’ demands for imports, introduced the reciprocal demands in
the picture. The demand for imports of each country is supposed to depend
on the possible barter ratios between the commodities and, once the recip-
rocal demands are known, the international equilibrium relative price can be
determined – and so are the benefits accruing to each nation. The interna-
tional equilibrium rate must lie within the interval bounded by the countries’
autarky relative prices of the commodities, and the more this rate is close to
(different from) a country’s relative autarky price, the smaller (the greater)
are this country’s gain from trade – this gain being nil when the two coincide.
J. S. Mill was thus pioneering a now well-established tradition in the field.
Some pending questions
It is however to be noted that, while more faithful to Ricardo’s text, the above
first interpretation of the principle of comparative advantage tells only part
of the story and leaves some important problems unsolved. As a matter of
fact, sticking as it does to Ricardo’s always quoted few paragraphs excerpted

Comparative advantage 9
from Chapter 7 of the Principles, it cannot avoid some difficulties (for a more
detailed analysis see Faccarello 2015).
A first difficulty ensues from the fact that the initial exchange ratio – that
is, aPortuguese wine = bEnglish cloth – is taken for granted. But this
relative price is assumed, not explained. As regards prices Ricardo, in these
paragraphs, simply stresses that, in foreign trade, the theory of labour value
does not apply because of the relative immobility of capital and labour. The
question thus remains of how this ratio is determined.
A second difficulty arises when we note that the benefits countries get from
foreign trade are assessed at the macroeconomic level. The principle of compar-
ative advantage tells us that it is in the interest of each country to exchange
and points out both the direction of trade and its global benefits. But the
countries are not themselves the agents of trade: they do not decide to import
and export such or such commodity with the view of obtaining a global bene-
fit in terms of capital allocation and enjoyment of use values. Economies are
market-based and only the individual agents, acting in markets according to
their own private interests decide what to do. In this perspective the principle
of comparative advantage is seemingly of no use to them and does not explain
why they engage in trade.
Finally, a third difficulty arises if we realise that, in the famous Chapter 7
of the Principles devoted to foreign trade, the developments mainly deal with
money prices and money flows between countries: is it possible to ignore this
fact and to isolate the above-quoted example – expressed in real terms and
generally interpreted as a barter between the two countries – from the rest of
the chapter?
These three main difficulties are of course linked together. We noted how
the traditional approach solved the first problem: is here the solution different?
As regards the second and third questions, they remain apparently unanswered
in both interpretations.
A monetary theory of foreign trade
As a matter of fact, and even if this is not obvious as long as we focus our
attention on the four magic numbers, Ricardo bases his views on foreign trade
on an analysis of the behaviour of individual agents in markets, in the con-

Comparative advantage 10
text of a monetary regime in which gold is the standard of money, is freely
traded domestically and abroad, and where banknotes are convertible in gold
on demand – i.e., an ideal gold standard: the analysis is slightly different in
a regime of inconvertibility. Moreover his theoretical approach also entails a
version of the quantity theory of money and a Humean-like specie-flow mecha-
nism, both being essential for his theory of international trade – we disregard
here the questions linked to the existence of bounties, taxes, etc. New research
is presently developing on these essential aspects of Ricardo’s thought, but it
is possible to give some hints along the following lines.
Ricardo’s developments are based on a simple idea: merchants engage in
trade – be it domestic or foreign – only if it is profitable for them to do so.
They buy and sell commodities considering their money prices and they trade
if they have a reasonable expectation to sell them dearer than they bought
them, the transportations costs being included in the computation (Works
I: 138, 170). Thus merchants do not barter but, at their individual level,
calculate in monetary terms. When they buy abroad and import, they settle
the transaction with a bill of exchange they buy in a specialised market, and
they receive such a bill when they export commodities. In the exchange of wine
and cloth between England and Portugal, this means that English merchants
import wine if and only if the price of wine is higher in England than in
Portugal, what seems intuitively the case owing to the costs of production,
but also that English merchants export cloth if and only if cloth is dearer in
Portugal than in England (ibid: 137) – what seems counter-intuitive in this
specific case. Ricardo gives an example where the price of one unit of wine is
respectively of 50£ in England and 45£ in Portugal, and that of one unit of
cloth is 45£ in England and 50£ in Portugal (ibid: 138).
These prices are of course gold prices, expressed in terms of convertible –
at its mint price – pounds sterling. Note also that the inequalities between
the prices of wine and cloth in the two countries respect the inequality, stated
above, between the cost ratios in the different countries. But the very notion
of a comparative advantage somewhat vanishes at the micro level – it is of no
use in decisions to trade – and, in this perspective, it is understandable that
Ricardo did not refer repeatedly to it in his writings. As for the celebrated
“gains from trade”, stated at the macro level, they can be considered as the
unintended consequence of the actions of agents in the market, whose only
purpose is their own individual monetary gain.

Comparative advantage 11
But why can such a trade of cloth between England and Portugal happen?
This is because, Ricardo states, gold does not have necessarily the same value in
different countries (Works I: 142–3). The monetary units of nations are defined
by specific weights of gold, and currencies are convertible into each other at the
rate given by the mint prices. But if gold does not have the same market value
– its exchange ratio with such or such commodity – everywhere, gold prices of
commodities will generally be higher, all other things being equal, where this
market value is lower, and lower where it is higher. Commodities produced
in exactly the same conditions in terms of labour value will thus not have
the same gold price, and it can happen that, like cloth in Ricardo’s example,
a commodity having the least labour value can have a higher price than the
same commodity with a superior labour value. This – and not the alleged
international relative immobility of capital and labour – is the explanation
why, between countries, the exchange ratios between commodities might not
be determined by the labour theory of value.
This state of things indicates the direction of the flows of trade and the
respective specialisation of countries in the usual cases. This also determines
the prices at which the transactions are made. Contrary to J. S. Mill’s ap-
proach, Ricardo’s reasoning is straightforward: if competition prevails in mar-
kets, the price of an imported commodity is simply the price which prevails
in the exporting country augmented by the costs of transportation, insurance
etc. (Works I: 340–1, 374–5).
Now why and when does gold not have the same market value in different
countries? Let us start from a situation of equilibrium to which Ricardo signif-
icantly refers with both phrases: “equilibrium of money” (ibid: 141–2, 145) and
“trade of barter” (ibid: 137, 140). Suppose a strict international immobility of
capital and labour: the balance of payment is thus reduced to the balance of
trade. Equilibrium is defined as the situation when there is no (net) flow of
gold between countries: it is a monetary equilibrium in the sense of Hume –
gold is divided between the different countries according to the natural needs
of trade. It is also the situation when, in modern parlance, the balance of
trade equilibrates.
This state of things is of course hypothetical: many destabilising shocks
can throw a country out of equilibrium. How and with which consequence? A
destabilising shock is by definition one which will disturb in the end, one way
or another, the optimal division of gold between nations and provoke a change

Comparative advantage 12
in the market value of gold in the country, thus generating modifications in
the gold prices and international flows of commodities. In this process the
comparative advantage of a country might change, temporarily or in a more
lasting way.
A bad harvest, for example, will suddenly make the quantity of money
“redundant” because there are less commodities to circulate. Prices will rise
in consequence, and gold flows out of the country because it becomes one of
the cheapest commodities. Consequently the market value of gold will rise and
money prices fall until the situation equilibrates: in this process, during the
period of disequilibrium, the comparative advantage of a country might change
but for a time only, until the next harvest. Imagine however, with Ricardo,
some technical improvement in the production of one commodity, wine in Eng-
land for example (Works I: 137). In this case also equilibrium is disrupted:
because of the fall of the price of wine, money will again become “superabun-
dant” in the country, with the same initial consequences as before: but here
the situation is a lasting one and the comparative advantage – and thus the
flows of international trade – of the country might be durably modified, with
the final attainment of another “equilibrium of money” or “trade of barter”.
See also:
Competition; Foreign Trade; Monetary Theory; Ricardo’s Four Magic Num-
bers.
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Comparative advantage 13
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