What’s it: Comparative advantage is a favorable position arising from producing goods and services at a lower opportunity cost. The basic idea is that when each person focuses on their comparative advantage, and trades with others to meet the rest of their needs, everyone gets what they need for less effort. What is Comparative Advantage? Comparative advantage is the principle which holds that world output is higher if every country produces and trades the good in which it has a comparative advantage. / Comparative Advantage: Definition, Assumptions, Examples, Criticisms. The law of comparative advantage applies to International Trade and was introduced by David Ricardo in the early 1800s. A comparative advantage in trade is the advantage that one country has over another in the production of a particular good or service. An example of absolute vs comparative advantage is of Saudi Arabia and Pakistan. This advantage may come because of a country's infrastructure, labor force, technology or innovations, or natural resources. Saudi Arabia has an absolute advantage in oil. For example, China uses cost leadership by exporting low-cost products at a reasonable quality level. Comparative advantage refers to the capacity of a country to produce goods and services at an opportunity cost rate lower than other countries. The meaning of absolute vs comparative advantage must be clear by now, so we will discuss a few examples of absolute vs comparative advantage now. ‘Socialism has a comparative advantage in the area of productive efficiency.’ ‘The benefits of globalization include the growth-enhancing ability of countries to tap their comparative advantages, the expansion of our export markets, and the price savings associated with imports.’ What is a Competitive Advantage? What did David Ricardo mean when he coined the term comparative advantage? 24 with respect to two countries (A and B) and two GOODS (X and Y). Comparative definition is - of, relating to, or constituting the degree of comparison in a language that denotes increase in the quality, quantity, or relation expressed by an adjective or adverb. This proposition is illustrated in Fig. Learn the rules for building and how to correctly construct sentences with comparative adjectives. A country can also create competitive advantage, a practice that's called national competitive advantage or comparative advantage. Having absolute advantage doesn’t necessarily mean an economy should produce that good. What are the Main Sources of Comparative Advantage? Due to differences in geographical situations, efficiency of labour, climate and natural resources, a country may have the ability to produce a commodity at a lower cost as compared to the other. Term Definition; Comparative Advantage; Comparative Advantage . Also called comparative cost principle. It therefore follows that free trade is beneficial to all countries, because each can gain if it specializes according to its comparative advantage. More simply, this means that a country can produce a good at a lower cost than another country. In other words, a nation sacrifices less of Good A to produce Good B than other nations. Definition: Comparative advantage is defined as the skill of producing a particular good or service more cost-effectively than other producers.In other words, it’s when company can produce a better quality product cheaper than its competitors. It is a profitability ratio measuring revenue after covering operating and non-operating expenses of a business. The country that has the comparative advantage in the production of the product changes from the innovating (developed) country to the developing countries. Comparative advantage definition: An advantage is something that puts you in a better position than other people. Comparative Advantage refers to the ability of a country or business organization to produce a specific product or service at lower marginal cost and opportunity cost, than the other countries. Discover what a comparative adjective is and when to use one. All these brands achieve important economies of scale by their strong brand name that increases customer loyalty and customer satisfaction. Comparative Advantage Definition. It most commonly refers to an index, called the Balassa index, introduced by Béla Balassa (1965). If a country is relatively better at making wine than wool, it makes sense to put more resources into wine, and to export some of the wine to pay for imports of wool. A country is said to have a comparative advantage in production of a good if it has lower opportunity costs in producing this good compared to another country or the rest of the world. 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