what is comparative advantage 
comparative advantage is an economy s ability to produce a particular good or service at a lower opportunity cost than its trading partners comparative advantage is used to explain why companies countries or individuals can benefit from trade in the context of international trade comparative advantage refers to the products that a country can produce more cheaply or easily than other countries however some contemporary economists contend that focusing solely on comparative advantage can result in the exploitation and depletion of a country s resources the law of comparative advantage is popularly attributed to english political economist david ricardo and his book on the principles of political economy and taxation written in 1817 although it is likely that ricardo s mentor james mill originated the analysis 1investopedia joules garciaunderstanding comparative advantagecomparative advantage is one of the most important concepts in economic theory and a fundamental tenet of the argument that all actors at all times can mutually benefit from cooperation and voluntary trade it is also a foundational principle in the theory of international trade the key to understanding comparative advantage is a solid grasp of opportunity cost put simply an opportunity cost is a potential benefit that someone loses out on when selecting a particular option over another in the case of comparative advantage the opportunity cost that is to say the potential benefit that has been forfeited for one company is lower than that of another the company with the lower opportunity cost and thus the smallest potential benefit which was lost holds this type of advantage another way to think of comparative advantage is as the best option given a trade off if you re comparing two different options each of which has a trade off some benefits as well as some disadvantages the one with the best overall package is the one with the comparative advantage people learn their comparative advantages through wages this drives people into those jobs that they are comparatively better at if a skilled mathematician earns more money as an engineer than as a teacher they and everyone they trade with are better off when they practice 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 example of comparative advantageas an example consider a famous athlete like michael jordan as a renowned basketball and baseball star michael jordan is an exceptional athlete whose physical abilities surpass those of most other individuals michael jordan would likely be able to say paint his house quickly owing to his abilities as well as his impressive height hypothetically say that michael jordan could paint his house in eight hours in those same eight hours though he could also take part in the filming of a television commercial which would earn him 50 000 by contrast jordan s neighbor joe could paint jordan s house in 10 hours in that same period of time he could also work at a fast food restaurant and earn 100 in this example joe has a comparative advantage as a house painter due to his lower opportunity cost and despite the fact that michael jordan could paint the house faster and better the best trade would be for michael jordan to film a television commercial and to pay joe to paint his house so long as michael jordan makes the expected 50 000 and joe earns more than 100 the trade is a winner owing to their diversity of skills michael jordan and joe would likely find this to be the best arrangement for their mutual benefit comparative advantage vs absolute advantagecomparative 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 their 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 suppose the attorney produces 175 per hour in legal services and 25 per hour in secretarial duties the secretary can produce 0 in legal services and 20 in secretarial duties in an hour here the role of opportunity cost is crucial to produce 25 in income from secretarial work the attorney must lose 175 in income by not practicing law their opportunity cost of secretarial work is high they are better off by producing an hour s worth of legal services and hiring the secretary to type and organize the secretary is much better off typing and organizing for the attorney their opportunity cost of doing so is low it s where their comparative advantage lies comparative advantage is a key insight that trade will still occur even if one country has an absolute advantage in all products comparative advantage vs competitive advantagecompetitive advantage refers to a company economy country or individual s ability to provide a stronger value to consumers as compared with its competitors it is similar to but distinct from comparative advantage in order to assume a competitive advantage over others in the same field or area it s necessary to accomplish at least one of three things the company should be the low cost provider of its goods or services it should offer superior goods or services than its competitors or it should focus on a particular segment of the consumer pool comparative advantage in international tradedavid ricardo famously showed how england and portugal both benefit by specializing and trading according to their comparative advantages in this case portugal was able to make wine at a low cost while england was able to cheaply manufacture cloth ricardo predicted that each country would eventually recognize these facts and stop attempting to make the product that was more costly to generate indeed as time went on england stopped producing wine and portugal stopped manufacturing cloth both countries saw that it was to their advantage to stop their efforts at producing these items at home and instead to trade with each other in order to acquire them comparative advantage is closely associated with free trade which is seen as beneficial whereas tariffs closely correspond to restricted trade and a zero sum game a contemporary example china s comparative advantage with the united states is in the form of cheap labor chinese workers produce simple consumer goods at a much lower opportunity cost the united states comparative advantage is in specialized capital intensive labor american workers produce sophisticated goods or investment opportunities at lower opportunity costs specializing and trading along these lines benefit each the theory of comparative advantage helps to explain why protectionism is typically unsuccessful adherents to this analytical approach believe that countries engaged in international trade will have already worked toward finding partners with comparative advantages if a country removes itself from an international trade agreement and imposes tariffs it may produce a local benefit in the form of new jobs and industry however this is not a long term solution to a trade problem eventually that country will be at a disadvantage relative to its neighbors countries that were already better able to produce these items at a lower opportunity cost the classical understanding of comparative advantage does not account for certain disadvantages that come from over specialization for example an agricultural country that focuses on cash crops and relies on the world market for food could find itself vulnerable to global price shocks criticisms of comparative advantage