The theory of
comparative advantage is an economic theory about the work
gains from trade for individuals, firms, or nations that arise from differences in their
factor endowments or
technological progress. In an
economic model, an
agent has a comparative advantage over another in producing a particular
good if they can produce that good at a lower relative
opportunity cost or
autarky price, i.e. at a lower relative
marginal cost prior to trade. One does not compare the monetary costs of production or even the resource costs (labor needed per unit of output) of production. Instead, one must compare the opportunity costs of producing goods across countries. The closely related
law or
principle of comparative advantage holds that under
free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage.