What is the difference between the free trade theories of absolute advantage and comparative advantage? How can free trade improve global efficiency?
Answer: Absolute advantage holds that different countries produce some goods more efficiently than other countries; thus, global efficiency can increase through free trade. Based on this theory, Adam Smith questioned why the citizens of any country should have to buy domestically produced goods when they could buy those goods cheaper abroad. But what happens when one country can produce all products at an absolute advantage? David Ricardo examined this question and expanded on Adam Smith's theory of absolute advantage to develop the theory of comparative advantage. Ricardo reasoned that there may still be global efficiency gains from trade if a country specializes in products that it can produce more efficiently than other products—regardless of whether other countries can produce those same products even more efficiently.