Comparative advantage: adam smith: free trade early 1800s, an actor"s ability to produce a good or service more efficiently than another actor"s to do so, specialization. Country a: good 1: 300, good 2: 150, 150/300 = units of good1 for every unit of good 2. Country b: good 1: 80, good 2: 240, 80/240: 1 unit of good 1 for every three units of good 2. Gains from trade: country a should focus on good 1 and country should focus on good 2. Total production is 300 + 240 = 540. H-o model: prices vary due to factors of production (inputs, capital land labor, explains trade patterns. When h-o model fails (similar factors of production little comparative advantage) Industrial countries should, theoretically, trade with agricultural economies based on h-o models. Complicate the model: factor flows, technological differences, exchange rates. Refocus investments and capital into specialized industry.