Question

Why did Ricardo think that international trade was based on comparative advantage while internal (domestic) trade was based on absolute advanatge? (international economics)

Answer 1

To understand Ricardo's thinking, we should distinguish between absolute and comparative advantage.

Comparative advantage and absolute advantage are different from each other in such a way that absolute advantage is the ability of being able to produce more or better goods and services than someone else whereas, comparative advantage is the ability to produce goods and services at a lower opportunity cost. A firm with a comparative advantage may not necessarily produce goods of a greater volume or quality.

Ricardo thinks that international trade was based on comparative advantage whereas, domestic trade was based on absolute advantage because the ability to produce certain goods or services also depends on the location of the firm and hence, each particular country will have a specialization in producing a particular good which will create a lot of competitors for that particular good in that country (absolute advantage in domestic trade) but, for the need of other goods, help from international trade will have to be sought (comparative advantage in international trade).