International trade: concepts and theories

Why do countries trade? Because they differ — in technology, resources and tastes — and trade lets each specialise where it is relatively efficient. Adam Smith's absolute advantage says a country exports what it produces cheapest in absolute terms; Ricardo's comparative advantage is deeper: even a country worse at everything gains by specialising in what it is least bad at. Worked example: if England needs 100 hours for cloth and 120 for wine, while Portugal needs 90 for cloth and 80 for wine, Portugal has the absolute advantage in both, but England's opportunity cost of cloth is 100/120 = 0.83 wine versus Portugal's 90/80 = 1.125 wine, so England has the comparative advantage in cloth and Portugal in wine.