International trade occurs because product prices would differ if there was no trade. This chapter begins our analysis of theories emphasizing production-side differences between countries as the reason for product prices to differ without trade. In Adam Smith's theory of absolute advantage, each country exports the product in which the country has the higher labor productivity. David Ricardo's principle of comparative advantage shows that beneficial trade can occur even if one country is worse (less productive) at producing all products. The principle of comparative advantage is based on the importance of opportunity cost-the amount of other products that must be foregone to produce more of a particular product. The principle states that a country will export products that it can produce at low opportunity cost in return for imports of products that it would otherwise produce at high opportunity cost. We can picture a country's production capabilities using a production-possibility curve (ppc) Ricardo's approach assumes constant marginal costs, so a country's ppc is a straight line. We can use graphs with countries' production-possibility curves to illustrate why countries trade according to comparative advantage, and to show that both countries can gain by trading. Contrary to mercantilist thinking, trade is not a zero-sum game in which one country would gain only when the other country loses.