What is the concept of comparative advantage?

Asked By: Abdul Itura | Last Updated: 22nd February, 2020
Category: business and finance job market
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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 company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

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Considering this, what is the concept of comparative advantage based on?

In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade.

Subsequently, question is, what is the law comparative advantage? “The Law of Comparative Advantage states that an entity maximises its resources by producing that which gives the best return, while delegating production of all other products and services to other entities more cost-effective in their production”

In this regard, what is an example of a comparative advantage?

Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. But the good or service has a low opportunity cost for other countries to import. For example, oil-producing nations have a comparative advantage in chemicals.

What is the concept of absolute advantage?

In economics, the principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.

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What are the sources of comparative advantage?

The quantity and quality of natural resources available for example some countries have an abundant supply of good quality farmland, oil and gas, or easily accessible fossil fuels. Climate and geography have key roles in creating differences in comparative advantage.

Why is comparative advantage important?

Comparative advantage. It is being able to produce goods by using fewer resources, at a lower opportunity cost, that gives countries a comparative advantage. The gradient of a PPF reflects the opportunity cost of production. Increasing the production of one good means that less of another can be produced.

What is the basic message of the theory of comparative advantage?

The basic message of the theory of comparative advantage. - Potential world production is greater with the unrestricted free trade than it is with the restricted trade. - The theory of comparative advantage suggests that trade is a positive sum game in which all countries that participate realize economic gains.

What are the disadvantages of comparative advantage?

Limitation of the theory of comparative advantage
  • Transport costs may outweigh any comparative advantage.
  • Increased specialisation may lead to diseconomies of scale.
  • Governments may restrict trade.

What is the difference between comparative advantage and absolute advantage?


Absolute advantage refers to lowering the production cost of a specific good in comparison to competitors. Comparative advantage specifically refers to the lower opportunity cost of production of specific goods in comparison to competitors.

What is an example of absolute advantage?

Absolute advantage refers to the ability of a nation to produce a product or service more cheaply than another nation. For example, India has an absolute advantage in operating call centers compared to the Philippines because of its low cost of labor and abundant labor force.

What is an example of a comparative?

Comparative adjectives are used to compare one noun to another noun. In these instances, only two items are being compared. For example, someone might say that "the blue bird is angrier than the robin." Superlative adjectives are used to compare three or more nouns.

When a country has a comparative advantage?

When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods.

Does China have a comparative advantage?


China's trade pattern is influenced not just by its overall comparative advantage in labor intensive goods but also by geography. The model predicts that China has a comparative advantage in heavy goods in nearby markets, and lighter goods in more distant markets.

What is the theory of comparative cost?

The Comparative cost theory is the basis of international trade. It explains that “it pays countries to specialize in the production of those goods in which they possess greater comparative advantage or the least comparative disadvantage.”

What is the law of comparative advantage and why is it important in international trade?

The existence of a comparative advantage allows both parties to benefit from trading, because each party will receive a good at a price that is lower than its opportunity cost of producing that good.

Is comparative advantage still relevant today?

Ricardo's "comparative advantage" still holds true today. The 19th-century British economist David Ricardo recognized that even when a nation is more efficient than another at producing all goods, it benefits by focusing on the one for which it is internally most efficient, and trading for the others.

What is the difference between absolute advantage and comparative advantage quizlet?

Absolute advantage is the ability to produce a good using fewer inputs than another producer, while comparative advantage is the ability to produce a good at a lower opportunity cost than another producer (reflecting the relative opportunity cost).

What are economies of scale and how are they achieved?


When more units of a good or service can be produced on a larger scale, yet with (on average) fewer input costs, economies of scale are said to be achieved. Alternatively, this means that as a company grows and production units increase, a company will have a better chance to decrease its costs.

What is comparative advantage example?

Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. Opportunity cost measures a trade-off. For example, oil-producing nations have a comparative advantage in chemicals.

What does the theory of comparative advantage offer as a guideline to countries?

Comparative Advantage and Free Trade
The theory suggests that total economic welfare in all countries is improved when countries focus on those industries where they have have the highest expertise and success, and the lowest opportunity costs. Comparative advantage says that countries should behave similarly.