Comparative advantage is a principle developed by David Ricardo in the early 19th century to explain the benefits of reciprocal trade (Carbaugh, 2008). Many underlying assumptions of comparative advantage depend on conditions of economic equilibrium and the absence of economies of scale. In reality, economies are dynamic and subject to innovation and interference; which led to a review of the performance and competition hypotheses (Krugman, 1987). These factors have created problems of free trade and government participation in the economy through the development of strategic trade policies. These new concepts do not replace the theory of comparative advantage; however, they further explain how trade can benefit a country's economy (Krugman, 1987). Theory of Comparative Advantage The principle of comparative advantage holds that trade can exist internationally even when one country holds a distinct advantage over another country in the production of a good. Ricardo made several assumptions for his theory to be true, including: the existence of a two-nation model with labor as the only input, a fluid transfer of labor between sectors, a fixed technology with zero transportation costs , the absence of government barriers that allow for balanced free trade, and ignorance of pricing and production patterns (Carbaugh, 2008). According to the Heckscher-Ohlin theory, the basis of trade is the abundance of resources, however trade balance is assumed through parity of technology and demand between nations (Nobel Media, 2006). Both theories require constant returns and assume the existence of perfect competition (Schweinberger, May 1996). Constant yield means that input and output costs remain the same over time regardless of production levels (AmosWEB LLC, 2000-2012). The… half of the paper… and for economic policy research: http://www.cepr.org/pubs/Bulletin/meets/215.htmDickson, P. R. (1996). The static and dynamic mechanics of competition: a commentary on Hunt and Morgan's theory of comparative advantage. Marketing Journal; Volume 60, 102-106. Hunt, S. D., & Morgan, R. M. (1995). The theory of comparative advantage of competition. The marketing journal; vol. 59, 1-15. Krugman, P. (1987). It's a pass for free trade.' The Journal of Economic Outlook; Vo 1, #2l, 131-144. Krugman, P., & Obstfeld, M. (2003). Economies of scale, imperfect competition and international trade. In I. Petsas, International Economics: Theory and Policy, sixth edition (pp. 6-2 to 6-61). Upper Saddle River, NJ: Pearson Education, Inc. .Nobel Media. (2006, February 28). Why trade. Retrieved from nobelprize.org: http://www.nobelprize.org/educational/economics/trade/ohlin.html