Economics Terms A-Z - The most important terms in economics.

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Economics Terms A-Z

Comparative Advantage

Having the comparative advantage (if, for example, you are a business) means that you can produce a good or service at a relatively lower cost than that of your competitors. Having the comparative advantage means you will be able to sell your goods for a lower cost than your competitors and potentially perform better. (‘Cost’ here refers to opportunity cost, not just monetary cost.) Comparative advantage is often used in reference to nations, where trading with a particular country may not result in the best product being purchased, but its purchase can be made at the lowest opportunity cost.

The theory was initially laid out in its classical form by economist David Ricardo in the 1700s. He argued then that, rather than England producing wine (for which the country didn’t have the correct climate) and Portugal cloth (for which it didn’t have adequate manufacturing capabilities), the two countries should simply stop making these products and trade what they could more easily make with each other at mutual benefit. Comparative advantage differentiates itself from absolute advantage, which says that some countries are able to do things significantly more efficiently than others. However, this doesn’t necessarily offer comparative advantage, as trading opportunity costs must also be taken into account.