The theory of comparative advantage, developed by David Ricardo in 1817, explains the gains from trade due to differences in resources or technology. Key assumptions include free trade, no transport costs, and homogeneous labor. The document also highlights types of cost differences in production, such as equal, absolute, and comparative cost differences.

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Theory of Comparative
Advantage
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Definition
The theory of comparative advantage, first
developed by English economist David
Ricardo in 1817, is a theory about the
potential gains from trade for companies,
countries or people that arise on account
of differences in factor endowments or
technological progress.

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Ricardo has explained the theory with
the following assumptions:
• There is free trade
• There is no transport cost
• Labour is homogeneous
• Cost of production is expressed in terms of
labour
• Production is subject to constant returns to
scale

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Types of cost difference in production:
• Equal cost difference
• Absolute cost difference
• Comparative cost difference

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