The Law of Comparative Advantage

In 1817, David Ricardo developed his theory of comparative advantage to explain why countries engage in trade together, even when one country has an absolute advantage. The law of comparative advantage holds true today, but comparative advantages for particular goods change. A country’s advantage ebbs and flows with currency value, labor availability, labor prices, tariffs and other factors when it comes to goods. The law of comparative advantage is always shifting on the map of the globe.

The last 10 years have been led by the dominance or advantage of products made in Asia, but profited from in the USA. The USA’s advantage has been primarily its lead in its entrepreneurial culture, company building, technology and the ability to raise money for businesses that benefit from these factors. The product that makes us think of this process of building in Asia, but profiting in the USA, is the iPhone produced by Apple. The product wasn’t in existence 20 years ago, so it gives us a particular view of the flow of money for goods globally from a 20-year perspective. It was the most purchased product by revenue during that era.

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