This video looks at why countries trade with each other, focusing on the theory of relative comparative advantage.

Scottish Economist Adam Smith in his book An Inquiry into the Nature and Causes of the Wealth of Nations (published in 1776) introduced the theory of Comparative Advantage when discussing countries trading with each other. He believed that countries should produce and sell goods where they can be produced cheaper in their country than in neighbouring countries i.e. they have an absolute advantage on cost by being the cheapest.

English economist David Ricardo later developed this theory by proposing relative comparative advantage. Being able to produce a certain product at the cheapest price (absolute comparative advantage) does not necessarily mean that you should produce and sell this product. Instead, you must look at your relative capabilities over a range of products (relative comparative advantage).

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