Two hundred years ago, the English Economist David Ricardo suggested that, instead of trying to produce everything that its citizens needed and wanted, each country should specialize in those goods that it could produce more efficiently than other countries. Each country would then trade for goods with the countries that specialized in producing them.
England had become the world's leading producer of textiles as a result of the Industrial Revolution. But the English climate was not conducive to growing grades on a large scale. Portugal, on the other hand, was a major grade-growing country, but its textile industry had not yet been mechanized. Thus, it made sense for England to manufacture textiles and not grow grapes and for Portugal to grow grapes rather than producing textiles. The two countries could then trade wiht one another to satisfy their wants.
A person, business, or country has an absolute advantage when it can produce more of a good or service than another producer that has the same quantity of resources.
In some cases, it is advantageous for a country to import goods and services from another country, even though they could be produced more cheaply at home. The principle of comparative advantage helps explains why this is so. Comparative advantage is the ability to produce a good or service at a lower opportunity cost than another producer.
In his book, The Wealth of Nations (1776), British Economist Adam Smith argued that specialization and its accompanying division of labor were the basis of economic progress. Smith believed it made more sense for people to work at whatever they do most profitably and to use their earnings to buy things they wanted. The same advice applies just as well to regions and countries.
Gains from trade result when two countries specialize in commodities in which they have a comparative advantage and exchange with one another, allowing each to benefit from increased consumption of goods they would not have without trade.