Whether the country has a competitive or comparative advantage will influence its decision making, ensuring that goods exported will result in higher levels of profit and lower opportunity cost. These concepts are different to each other even though comparative advantage is also a form of competitive advantage. As these terms are easily confused by many, the following article aims to resolve this confusion with a clear explanation of the two concepts. What is Comparative Advantage?
It is also a foundational principle in the theory of international trade.
Absolute Advantage Comparative advantage is contrasted with absolute advantage. Absolute advantage refers to the ability to produce more or better goods and services than somebody else.
Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality. To see the difference, consider an attorney and his or her secretary. The attorney is better at producing legal services than the secretary and is also a faster typist and organizer.
In this case, the attorney has an absolute advantage in both the production of legal services and secretarial work. Nevertheless, they benefit from trade thanks to their comparative advantages and disadvantages.
Here, the role of opportunity cost is crucial. Her opportunity cost of secretarial work is high. The secretary is much better off typing and organizing for the attorney; his opportunity cost of doing so is low. International Trade David Ricardo famously showed how England and Portugal both benefit by specializing and trading according to their comparative advantages, Portugal with wine and England with cloth.
Chinese workers produce simple consumer goods at a much lower opportunity cost. American workers produce sophisticated goods or investment opportunities at lower opportunity costs. Specializing and trading along these lines benefits each.
Diversity of Skills People learn their comparative advantages through wages. This drives people into those jobs they are comparatively best at. If a skilled mathematician earns more as an engineer than as a teacher, he and everyone he trades with is better off when he practices engineering.
Wider gaps in opportunity costs allow for higher levels of value production by organizing labor more efficiently. The greater the diversity in people and their skills, the greater the opportunity for beneficial trade through comparative advantage.Comparative advantage is what a country produces for the lowest opportunity cost.
It differs from absolute and competitive advantage. Comparative and competitive advantage are similar to each other in that comparative advantage is a component of competitive advantage, and both these comparative and competitive advantage play an important role in decision making.
In the late s, the famous economist Adam Smith wrote this in the second chapter of his book The Wealth of Nations: 'It is the maxim of every prudent master of a family. Comparative advantage. It can be argued that world output would increase when the principle of comparative advantage is applied by countries to determine what goods and services they should specialise in producing.
Comparative advantage is a term associated with 19th Century English economist David Ricardo.. Ricardo considered what goods and services countries should produce, . Comparative advantage is an economic term that refers to an economy's ability to produce goods and services at a lower opportunity cost than that of trade partners.
A comparative advantage gives a. of competitive advantage have the potential of offering a much richer analysis of international trade/business, normally not available with either the model(s) of comparative advantage or the model(s) of competitive advantage alone.