In Table 32-1 , the absolute cost for both wheat and cloth is less in
Canada than in the EU. Canada is therefore said to have an absolute
advantage over the EU in the production of both wheat and cloth because
it is a more efficient producer—it takes less labour and other resources to
produce the goods in Canada than in the EU.
The situation in Table 32-1 is hypothetical, but it is encountered often in
the real world. Some countries, because they have access to cheap natural
resources or low-cost labour or more sophisticated capital equipment, are
low-cost producers for a wide range of products. Does this mean that
high-cost countries stand no chance of being successful producers in a
globalized world of international trade? Will the low-cost countries
produce everything, leaving nothing to be done by high-cost countries?
The answer is no. As we will see immediately, the gains from
international trade do not depend on the pattern of absolute advantage.
Comparative Advantage
The great English economist David Ricardo (1772–1823) was the first to
provide an explanation of the pattern of international trade in a world in
which countries had different costs. His theory of comparative advantage