Comparative advantage

If resources were not fully mobile internationally, it was still possible for trade to yield advantages for all parties, even though some of them were not the most efficient in terms of resource use. This idea, developed as the principle of comparative advantage, is usually associated with Ricardo's Principles of 1817. However, Robert Torrens published the idea two years before Ricardo (Torrens, 1815; Robbins, 1958). The argument was basically that if one country were generally more efficient than another, it would initially run a balance-of-payments surplus and gold would flow to it. This would inflate its money supply and raise its price level, with this process continuing until both countries were in balance-of-payments equilibrium. The more efficient country would import those commodities in which its productivity advantage was least, and export those in which its superiority was greatest.

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