Theory of Comparative Cost

Today we’re revisiting a cornerstone of international economics. It’s a concept so simple in logic yet so powerful in implication that it underlies the entire modern global trading system.

This is the Theory of Comparative Cost — and it explains why countries, companies, and even individuals should specialize in what they do best, even if they’re better at everything.

Let’s get smarter.

What Is the Theory of Comparative Cost?

The Theory of Comparative Cost, more commonly known as Comparative Advantage, was developed by the British economist David Ricardo in the early 19th century.

Here’s the core idea:

A country (or person) should specialize in the goods or services for which it has the lowest opportunity cost, and trade for everything else — even if it could produce all of them more efficiently.