Which theory says countries gain by specializing where they have the lowest opportunity cost?

The theory saying countries gain by specializing in goods with the lowest opportunity cost is the theory of comparative advantage.

David Ricardo developed the classical theory in 1817 to explain why trade can benefit two countries even when one is more productive in making every good. A country has a comparative advantage when producing one good requires giving up less of another good than it would elsewhere.

The key idea is relative cost, not absolute productivity. A country may have an absolute advantage in every product but still gain by specializing in the product where its advantage is greatest, while importing goods with higher relative opportunity costs. With suitable terms of trade, total consumption can rise for both trading partners.

Ricardo’s original version used labor requirements, while economist Gottfried Haberler reformulated comparative advantage around opportunity cost in 1930 using production possibility curves. Comparative advantage is therefore different from absolute advantage, which concerns who can produce more with the same resources. It also does not require complete specialization in every realistic economy.