The theories of absolute and comparative advantage have been offered as economic rationale for trade between and among regions and countries

- A country has an absolute advantage in producing a good (or service) if it is able to produce that good at a lower cost or use fewer resources in its production than its trading partner.

o For example, suppose a worker in Brazil can produce either 20 pens or 40 pencils in a day. A worker in China can produce either 10 pens or 60 pencils. A Chinese worker produces 60 pencils a day while a Brazilian worker produces only 40 pencils a day. Hence, China produces pencils at a lower cost than Brazil, and has an absolute advantage in the production of pencils. Similarly, Brazil produces pens at a lower cost than China, and hence has an absolute advantage in the production of pens.

- A country has a comparative advantage in producing a good if its opportunity cost of producing that good is less than that of its trading partner.

o In our example, the opportunity cost of producing an extra pen in China is 6 pencils. It is the opportunity foregone; namely, the number of pencils China would have to give up to produce an extra pen. If Brazil does not trade and has to produce both pens and pencils, it will have to give up 2 pencils in order to produce a pen. Similarly, in China each pen will cost 6 pencils. Hence, the opportunity cost of a pen in Brazil is 2 pencils, whereas in China it is 6 pencils. Brazil has the lower opportunity cost and thus a comparative advantage in the production of pens. China has a lower opportunity cost (1 pencil costs 1/6th of a pen) than Brazil (1 pencil costs ½ a pen) in the production of pencils and thus has a comparative advantage in the production of pencils.

- The further away the world price of a good or service is from its autarkic price in a given country, the more that country gains from trade.

- Growth in global trade during the last 25 years is driven by the comparative advantage. It is important to note that even if a country does not have an absolute advantage in producing any of the goods, it can still gain from trade by exporting the goods in which it has a comparative advantage.

- A country’s comparative advantage can change over time as a result of structural shifts in its domestic economy, shifts in the global economy, the accumulation of physical or human capital, new technology, the discovery of such natural resources as oil, and so on. For example, an increase in skilled labor in China has led several multinational companies to establish R&D facilities in China to benefit from its highly educated workforce.

The Stolper-Samuelson Theorem is based on the idea that resources which are abundant in nature are of more value, than the resources which are scarc in the country. In case, ifthere is a rise in the price of a labor intensive good, then the real value of intensive resource, which is labor in that particular good will rise, while the value of capital used in producing that good will decline.

So as the trade flourishes, the factors of production which are abundant in nature will be demanded more, and there value will rise.

This shows that the factors that are abundant in nature are benefitted when the nation involves in free trade.

This theorem is beneficial in showing how the increase in trade between the developed, and developing nations has led to an increase in the inequality in wages of skilled, and unskilled labor.

Let us take an example of United States.

As US starts to trade more with China, there is an increase in the demand for US products. The US is a capital intensive country, which focuses mainly on capital intensive goods.

So as the trade flourishes, and the demand for US goods, and services increases, there is a rise in the value of capital intensive resources.

This results into a rise in wages of skilled labor, which is able to operate machinery, and new technology, while the wages of unskilled labor, who are involved in manufacturing labor intensive goods decline.

This is in accordance with the Stolper-Samuelson theorem, where the wage inequality is rising because of more trade, and higher demand for the good which has abundant resources.

Hence in US, the wages of skilled workers is increasing, and wages of unskilled workers is decreasing resulting into more wage inequality.