every private family can scarcely be folly in that of a great kingdom , he wrote. This analysis implied that countries should concentrate on industries in which they are the low-cost producer, or in the language of todays economists, industries in which they have an absolute advantage over foreign competitors A classic example involved Lancashire textile mills, which exploited the damp climate of northern England and Portuguese vineyards, which prospered in the southern sun. In the presence of prohibitive tariffs or imports and exports, which were widespread at the time Smith was writing, England would have been forced to make its own wine(or go without), and portugal would have had to manufacture cloth, which would have wasted valuable resources. But if free trade was introduced each country could concentrate on its strength, with England exchanging its surplus cloth for Portugal's surplus wine, to the benefit of consumers in both places The principle of absolute advantage is relatively easy to understand and economists cite it all the time in an attempt to alleviate concerns about outsourcing. The benefits from new forms of trade, such as in services, are no different from the benefits from traditional trade in goods , the Council of Economic Advisers said in its testimony to Congress earlier this year. When a good or service is produced at lower cost in another country it makes sense to import it rather than produce it domestically. This allows the United States to devote its resources to more productive purposes However, some types of offshoring are not so easy to rationalize. American insurance firms are hiring workers in countries like India to process customer claims. Yet many of the Americans who are being displaced are well-educated and productive employees who could probably do the job better than their Indian counterparts. Why then, does this sort of trade benefit the United States? David Ricardo, another ancient British economist, answered this question in"Principles of Political Economy and Taxation, which was published in 1817, and it is his defense of free trade that Mankiw and his colleagues rely on to this day. Where Smith argued that nations gain by exporting goods which they can make more cheaply than other countries Ricardo said that trade between countries makes sense even if one of the countries is the W-cost producer in every industry Suppose, he said that in Portugal it takes ninety workers to make cloth and eighty workers to make wine, whereas in England cloth production requires a hundred workers and wine production requires a hundred and twenty. Then, assuming wages are the same in both countries, Portugal has an "absolute advantage in wine and cloth. should it still trade with England? Yes, said Ricardo. Compared with each other, he pointed out, Portugals vineyards are still more efficient than its textile mills. Therefore, it makes sense for the country to specialize in wine production, export what it doesnt need, and import British cloth Portugal's comparative advantage lies in wine Ricardos argument is subtle-Paul Samuelson, the great M.I.T. economist, once said that comparative the United States shouldn't try to keep hold of low-value businesses such as insurance processing ano o advantage is the most difficult economic theory to grasp-but it is also extremely powerful. It implies tha elephone-call centers, even if its workers could operate them more efficiently than their counterparts in developing countries. Instead, it should concentrate on building up businesses like publishing and entertainment, where the displaced workers can be employed more productively. According to some estimates, the copyright business, which includes film, music, books, and software, accounts for about five er cent of the Gross Domestic Product, which means it is the biggest sector in the economy, bigger even han the auto industry. If the economists are to be believed, this is just as things should be: one industry that the United states used to dominate declines; another rises to take its place Any sensible discussion of trade has to acknowledge the power of comparative advantage. Capitalism has succeeded where other systems have failed in large part because it allows countries to develop according to its dictates. Poor places, like Mauritius and Indonesia, start out by producing labor-intensive goods such as toys and clothing. Middle-income countries, such as South Korea and Taiwan, enter more advanced businesses, such as the manufacture of automobiles and consumer electronics. And developed nations, such as Japan and the United States, operate at the frontier of technology, creating industries like wireless communications and biotechnology. This hierarchy of production helps lift poor nations out of poverty. According to the World Bank, between 1981 and 2001 in East Asia the number of people living on less than a dollar a day, which is the bank's threshold for acute poverty fell from about eight hundred million to less than three hundred million. This dramatic reduction would not have taken place if Thailand Malaysia, and other Asian countries had been unable to export their products to the developed worldevery private family can scarcely be folly in that of a great kingdom," he wrote. This analysis implied that countries should concentrate on industries in which they are the low-cost producer, or, in the language of today's economists, industries in which they have an "absolute advantage" over foreign competitors. A classic example involved Lancashire textile mills, which exploited the damp climate of northern England, and Portuguese vineyards, which prospered in the southern sun. In the presence of prohibitive tariffs on imports and exports, which were widespread at the time Smith was writing, England would have been forced to make its own wine (or go without), and Portugal would have had to manufacture cloth, which would have wasted valuable resources. But if free trade was introduced each country could concentrate on its strength, with England exchanging its surplus cloth for Portugal's surplus wine, to the benefit of consumers in both places. The principle of absolute advantage is relatively easy to understand, and economists cite it all the time in an attempt to alleviate concerns about outsourcing. "The benefits from new forms of trade, such as in services, are no different from the benefits from traditional trade in goods," the Council of Economic Advisers said in its testimony to Congress earlier this year. "When a good or service is produced at lower cost in another country, it makes sense to import it rather than produce it domestically. This allows the United States to devote its resources to more productive purposes." However, some types of offshoring are not so easy to rationalize. American insurance firms are hiring workers in countries like India to process customer claims. Yet many of the Americans who are being displaced are well-educated and productive employees who could probably do the job better than their Indian counterparts. Why, then, does this sort of trade benefit the United States? David Ricardo, another ancient British economist, answered this question in "Principles of Political Economy and Taxation," which was published in 1817, and it is his defense of free trade that Mankiw and his colleagues rely on to this day. Where Smith argued that nations gain by exporting goods which they can make more cheaply than other countries, Ricardo said that trade between countries makes sense even if one of the countries is the low-cost producer in every industry. Suppose, he said, that in Portugal it takes ninety workers to make cloth and eighty workers to make wine, whereas in England cloth production requires a hundred workers and wine production requires a hundred and twenty. Then, assuming wages are the same in both countries, Portugal has an "absolute advantage" in wine and cloth. Should it still trade with England? Yes, said Ricardo. Compared with each other, he pointed out, Portugal's vineyards are still more efficient than its textile mills. Therefore, it makes sense for the country to specialize in wine production, export what it doesn't need, and import British cloth. Portugal's "comparative advantage" lies in wine. Ricardo's argument is subtle-Paul Samuelson, the great M.I.T. economist, once said that comparative advantage is the most difficult economic theory to grasp-but it is also extremely powerful. It implies that the United States shouldn't try to keep hold of low-value businesses, such as insurance processing and telephone-call centers, even if its workers could operate them more efficiently than their counterparts in developing countries. Instead, it should concentrate on building up businesses like publishing and entertainment, where the displaced workers can be employed more productively. According to some estimates, the copyright business, which includes film, music, books, and software, accounts for about five per cent of the Gross Domestic Product, which means it is the biggest sector in the economy, bigger even than the auto industry. If the economists are to be believed, this is just as things should be: one industry that the United States used to dominate declines; another rises to take its place. Any sensible discussion of trade has to acknowledge the power of comparative advantage. Capitalism has succeeded where other systems have failed in large part because it allows countries to develop according to its dictates. Poor places, like Mauritius and Indonesia, start out by producing labor-intensive goods, such as toys and clothing. Middle-income countries, such as South Korea and Taiwan, enter more advanced businesses, such as the manufacture of automobiles and consumer electronics. And developed nations, such as Japan and the United States, operate at the frontier of technology, creating industries like wireless communications and biotechnology. This hierarchy of production helps lift poor nations out of poverty. According to the World Bank, between 1981 and 2001 in East Asia the number of people living on less than a dollar a day, which is the bank's threshold for acute poverty, fell from about eight hundred million to less than three hundred million. This dramatic reduction would not have taken place if Thailand, Malaysia, and other Asian countries had been unable to export their products to the developed world