Comparative advantage is a term economists use, especially in international trade. A country has a comparative advantage when it can make goods or services at a lower opportunity cost than another country.
Ricardo's example[change | change source]
|Country \ Produce||Cloth||Wine|
Suppose the number shows the number of hours required to create one piece of cloth or one crate of wine. In 100 hours, England can either make 1 unit of cloth or 5/6 units of wine. Meanwhile in 90 hours Portugal can make 1 unit of cloth or 9/8 units of wine. Portugal has an absolute advantage in both. However England's opportunity cost of 5/6 is lower than Portugal's OC 9/8. Hence England has a comparative advantage in cloth-making.
Theory predicts that even if one country can produce all good more efficiently than another, trade will make both better off if they specialize in the goods they have a comparative advantage in.
Related pages[change | change source]
References[change | change source]
- Maneschi, Andrea 1998. Comparative advantage in international trade: a historical perspective. Cheltenham: Elgar. p. 1.
- Amadeo, Kimberly. "Understanding Comparative Advantage". The Balance. Retrieved 2019-07-18.
Other websites[change | change source]
- What Is Comparative Advantage? | The Street
- Comparative advantage and when to blow up your island
- Ricardo's Difficult Idea, Paul Krugman's 1996 exploration of why non-economists don't understand the idea of comparative advantage
- What is comparative advantage? | Investopedia