Comparative Advantage

Updated Dec 31, 2022

Definition of Comparative Advantage

Comparative Advantage is an economic concept that describes the ability of a country or an individual to produce a good or service at a lower opportunity cost than its competitors. That means it is the ability to produce a good or service at a lower cost than other producers, even when the other producers have an absolute advantage in production.

Example

To illustrate this, let’s look at an example of two countries, Country A and Country B. Both countries have the same amount of resources available to produce cars and computers. Country A has a higher absolute advantage in the production of both cars and computers. That means it can produce more cars and computers than Country B with the same amount of resources.

However, Country B has a lower opportunity cost for producing cars. That means it can produce an additional car by reducing the production of computers less than country A. In that case, Country B has a comparative advantage in the production of cars.

Why Comparative Advantage Matters

Comparative advantage is an important concept for understanding international trade. It explains why countries specialize in the production of certain goods and services and then trade them with other countries. That way, countries can benefit from the lower opportunity costs of their trading partners and increase their overall wealth.

On an individual level, comparative advantage is also important. It helps individuals to identify their strengths and weaknesses and decide which activities they should focus on. That way, they can maximize their productivity and increase their income.