Comparative Advantage

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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: 134-136) of Chapter 7, “On foreign
trade” (ibid: 128-149), of Ricardo’s Principles 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
∗Panthéon-Assas University, Paris. Email: gilbert.faccarello@u-paris2.fr. Home-
page: http://ggjjff.free.fr/. Published in The Elgar Companion to David Ricardo,
Heinz D. Kurz and Neri Salvadori (eds), Cheltenham: Edward Elgar, 2015.
1

Comparative advantage 2
to be examined and debated, and this created some confusion. A clear
understanding of the principle thus requires going back to the texts and
answering some simple questions (Faccarello 2015). How was it stated?
How was 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: 134-135). A specific exchange ratio
is supposed to take place between these two countries: aunits of Por-
tuguese wine are exchanged for bunits of English cloth. It is also stated
that, had each country to produce these very quantities of both com-
modities, 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 summarized in Table 1.
In spite of the fact that Portugal has an absolute advantage — i.e.,
smaller real costs — in the production of both commodities, and Eng-
land 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: wine is relatively less expensive to pro-
duce than cloth in Portugal, and cloth relatively less expensive to produce
than wine in England.

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Table 1: The ‘four magic numbers’ in Ricardo’s text.
aunits of wine bunits of cloth
Portugal 80 90
England 120 100
What happens here between nations is the same than what happens
between two individuals. Adapting an example from the Wealth of Na-
tions in which Smith presents the advantages of a division of labour be-
tween a tailor and a shoemaker (WN IV.ii: 456-457) before generalizing
the case to countries, Ricardo reports the case of two men making shoes
and hats, one of them having 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 specialize 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 specialize in some production and to exchange. The
direction of trade and specialization 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
cannot 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 '0,9
in Portugal and 120/100 = 1,2in 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

Comparative advantage 4
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 international 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 international immobility of capital and
labour, which stands in strong contrast with their domestic mobility
(Works I: 135-136).
The gains from trade and specialization
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

Comparative advantage 5
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 advanta-
geous to import a foreign commodity in exchange for a good domestically
produced at a smaller real cost than the production at home of the im-
ported 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
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 specialization, Ricardo generally supposes that, when con-
stant returns to scale prevail and there is no great difference in size be-
tween countries, international trade results in a complete specialization
of countries. He recognizes however that there could be cases of partial
specialization, for example when one of the commodities traded — e.g.,
corn — is produced with an increasing difficulty of production.

Comparative advantage 6
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 commen-
tators 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 writings from which they are
excerpted (Torrens 1808, 1815), are only incidental 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

Comparative advantage 7
(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 ques-
tion arose of the origin of the phrase “comparative advantage” to desig-
nate a principle for foreign trade. The words “comparative” or “compar-
atively” 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 in-
cidentally 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 in-
ternational 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 “com-
parative 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 compara-
tive 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 advan-
tage” 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 “advan-
tage 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.

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The traditional view: a different statement of the prin-
ciple 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 rel-
atively 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 in-
terpretation.
The tradition — still to be found in the textbooks of history of eco-
nomic 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 neoclassical economists (on this
history see, for example, Viner 1937 and Maneschi 1998). It went un-
questioned 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
analysis is again conducted in real terms, the “four magic numbers” are
interpreted as the technical coefficients prevailing in the production pro-
cesses in the two countries — and consequently as the labour values of
one unit of each commodity in each country. Hence the following mod-
ified table, in which the countries are first considered in autarky (Table
2).
Once the countries open to foreign trade, international exchanges en-
sue following the indication given by the relative pre-trade costs. Except

Comparative advantage 9
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
in the unlikely case where no trade is possible because of identical rela-
tive 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 analysis and results. Ricardo’s statement of the principle started
with an actual exchange between England and Portugal. The relative
price of the two commodities was given — aunits of wine = bunits of
cloth — and the gains from trade for each country immediately deter-
mined 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 realized are still to be answered and, from this
point of view, Ricardo’s approach is allegedly incomplete. 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 reciprocal demands are known, the international equilibrium rela-
tive price can be determined — and so are the benefits accruing to each

Comparative advantage 10
nation. The international 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 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 comparative 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 benefit 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 inter-
ests decide what to do. In this perspective the principle of comparative

Comparative advantage 11
advantage is seemingly of no use to them and does not explain why they
engage in trade.
Finally, a third difficulty arises if we realize that, in the famous Chap-
ter 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 coun-
tries — 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 solu-
tion 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 context 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 mechanism, 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

Comparative advantage 12
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 specialized 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 convert-
ible — at its mint price — pounds sterling. Note also that the inequalities
between the prices of wine and cloth in the two countries respect the in-
equality, 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.
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: 142-143). 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

Comparative advantage 13
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 specialization of countries in the usual cases. This also
determines the prices at which the transactions are made. Contrary to J.
S. Mill’s approach, Ricardo’s reasoning is straightforward: if competition
prevails in markets, 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: 340-341, 374-375).
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 significantly refers with both phrases: “equilibrium of money”
(ibid: 141-142, 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 destabilizing
shocks can throw a country out of equilibrium. How and with which
consequence? A destabilizing 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 in the market value of gold in the country,
thus generating modifications in the gold prices and international flows

Comparative advantage 14
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 be-
comes 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 ad-
vantage 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 England 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 “superabundant” 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 in-
ternational 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 15
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