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Comparative Advantage and Gains from Trade

  • Levels: AS, A Level, IB
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC
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This revision video takes students through a worked example of comparative advantage and the potential gains from specialisation and trade at a mutually beneficial terms of trade between two countries.

Comparative Advantage and the Gains from Trade

David Ricardo, one of the founding fathers of classical economics developed the idea of comparative advantage

Comparative advantage exists when
  • Relative opportunity cost of production for a good or service is lower than in another country
  • A country is relatively more productively efficient than another
Basic rule – specialise in the goods and services that you are relatively best at
This opens up important potential gains from specialisation and trade leading to a more efficient allocation of scarce resources

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Geoff Riley

Geoff Riley FRSA has been teaching Economics for nearly thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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